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Does Risk Explain Anomalies? Evidence from Expected Return Estimates

47 Pages Posted: 3 May 2010 Last revised: 6 Aug 2010

Jin (Ginger) Wu

University of Georgia - Department of Banking and Finance

Lu Zhang

Ohio State University - Fisher College of Business; National Bureau of Economic Research (NBER)

Date Written: April 2010

Abstract

We construct accounting-based costs of equity for dollar neutral long-short trading strategies formed on a comprehensive list of anomaly variables. These variables include book-to-market, size, composite issuance, net stock issues, abnormal investment, asset growth, investment-to-assets, accruals, earnings surprises, failure probability, return on assets, and short-term prior returns. Our findings are striking. Except for the value premium, cost of equity estimates differ dramatically from average realized returns. If accounting-based costs of equity are reasonable proxies for expected returns, the evidence implies that returns of most anomalies are unexpected, and that mispricing, not risk, is the main driving force of capital markets anomalies.

Suggested Citation

Wu, Jin (Ginger) and Zhang, Lu, Does Risk Explain Anomalies? Evidence from Expected Return Estimates (April 2010). NBER Working Paper No. w15950. Available at SSRN: https://ssrn.com/abstract=1598066

Jin (Ginger) Wu (Contact Author)

University of Georgia - Department of Banking and Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Lu Zhang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
585-267-6250 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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