Asset-Pricing Anomalies at the Firm Level

49 Pages Posted: 18 Jun 2014

See all articles by Scott Cederburg

Scott Cederburg

University of Arizona - Department of Finance

Michael S. O'Doherty

University of Missouri at Columbia - Department of Finance

Date Written: June 16, 2014

Abstract

We introduce a hierarchical Bayes approach to model conditional firm-level alphas as a function of firm characteristics. Our empirical framework is motivated by growing concerns in the literature regarding the reliability of inferences from portfolio-based methods. In our initial tests, we confirm the existence of several CAPM anomalies at the firm level. Prominent multifactor models deliver only a modest improvement, however, as they often resolve only those anomalies which are directly linked to their additional factors. Further results suggest that the economic importance of CAPM anomalies is overstated. We find that anomalies are primarily confined to small stocks, few characteristics are associated with CAPM alphas out of sample, and many firm characteristics do not contain unique information about abnormal returns.

Keywords: Hierarchical Bayes, Factor models, Asset-pricing anomalies

JEL Classification: C11, G10, G12, G14

Suggested Citation

Cederburg, Scott and O'Doherty, Michael S., Asset-Pricing Anomalies at the Firm Level (June 16, 2014). Journal of Econometrics, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2451582

Scott Cederburg

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Michael S. O'Doherty (Contact Author)

University of Missouri at Columbia - Department of Finance ( email )

Robert J. Trulaske, Sr. College of Business
401 Cornell Hall
Columbia, MO 65211
United States

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