Asset Pricing Anomalies and Macroeconomic Risk
45 Pages Posted: 1 Sep 2011
Date Written: April 1, 2011
This paper provides a comprehensive examination of whether portfolios formed on capital asset pricing model anomalies capture information related to changes in the investment opportunity set and therefore may appropriate candidates as state variables within Merton’s (1973) ICAPM framework. Consistent with prior literature that relates them to macroeconomic risk, the size and momentum factors are shown to lose their explanatory power after controlling for innovations in state variables. In contrast, returns on portfolios formed using the book-to-market factor persist after controlling for state variables shown in previous literature to predict future market returns. This result suggests that this factor is not a risk factor within the ICAPM. The value premium varies counter-cyclically, suggesting the contrarian investment strategy is riskier. Two other anomalies, asset growth and tangibility, are also examined, with evidence suggesting that they are explained by mispricing rather than risk.
Keywords: asset pricing, Fama-French model, macroeconomic risk, ICAPM
JEL Classification: G11, G12, G17
Suggested Citation: Suggested Citation