Asset Pricing Anomalies and Macroeconomic Risk

45 Pages Posted: 1 Sep 2011

See all articles by Paul Docherty

Paul Docherty

Monash University

H. Chan

University of Melbourne - Department of Finance; Monash University - Department of Accounting

Stephen Andrew Easton

University of Newcastle

Date Written: April 1, 2011

Abstract

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

Docherty, Paul and Chan, Howard and Easton, Stephen Andrew, Asset Pricing Anomalies and Macroeconomic Risk (April 1, 2011). 24th Australasian Finance and Banking Conference 2011 Paper. Available at SSRN: https://ssrn.com/abstract=1910983 or http://dx.doi.org/10.2139/ssrn.1910983

Paul Docherty (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

Howard Chan

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Monash University - Department of Accounting ( email )

Building 11E
Clayton, Victoria 3800
Australia

Stephen Andrew Easton

University of Newcastle ( email )

University Drive
Callaghan, nsw 2308
Australia

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