Digesting Anomalies: An Investment Approach
Charles A. Dice Center Working Paper No. 2012-021
95 Pages Posted: 26 Sep 2012 Last revised: 5 Dec 2012
Date Written: December 4, 2012
Motivated from investment-based asset pricing, we propose a new factor model that consists of the market factor, a size factor, an investment factor, and a return-on-equity factor. The new model [i] outperforms the Carhart (1997) four-factor model in pricing portfolios formed on earnings surprise, idiosyncratic volatility, financial distress, equity issues, as well as on investment and return-on-equity; [ii] performs similarly as the Carhart model in pricing portfolios on momentum as well as on size and book-to-market; but [iii] underperforms in pricing the total accrual deciles. Our model’s performance, combined with its clear economic intuition, suggests that it can serve as a new workhorse model for academic research and investment management practice.
Keywords: Asset pricing anomalies, investment, ROE, factor models, investment-based asset pricing
JEL Classification: G12, G14
Suggested Citation: Suggested Citation