Abnormal Trading Around Common Factor Pricing Models
42 Pages Posted: 8 Sep 2014
Date Written: September 8, 2014
I find that firms which are predicted to transfer among the factor portfolios of Fama and French (1993) exhibit strong and statistically significant short-term variation in stock price and volume. Short-term returns around the cutoff values comprising SMB and HML tend to be temporarily high if the firm is predicted to move into a long component of a factor-mimicking portfolio, and temporarily low if moving into a short component. Similar results are apparent when examining movement in and out of the 25 size and book-to-market sorted test asset portfolios. Using the investor classifications provided by Bushee (2001), I find that return and volume effects are strongest when highly active institutional investors are in consensus about newly entering into an equity position in the firm. The results raise interesting methodological questions about the pricing implications arising from common methodologies themselves.
Keywords: Fama-french, asset pricing models, factor methodology, active investing, quantitative investing
JEL Classification: G12, G14, G00, D40, C23
Suggested Citation: Suggested Citation