Review of Financial Studies 30, April 2017, pp 1270-1315.
93 Pages Posted: 5 Jul 2015 Last revised: 16 Apr 2017
Date Written: September 17, 2016
A four-factor model with two “mispricing” factors, in addition to market and size factors, accommodates a large set of anomalies better than notable four- and five-factor alternative models. Moreover, our size factor reveals a small-firm premium nearly twice usual estimates. The mispricing factors aggregate information across 11 prominent anomalies by averaging rankings within two clusters exhibiting the greatest return comovement. Investor sentiment predicts the mispricing factors, especially their short legs, consistent with a mispricing interpretation and the asymmetry in ease of buying versus shorting. A three-factor model with a single mispricing factor also performs well, especially in Bayesian model comparisons.
Keywords: Factor Models, Anomalies, Mispricing, Investor Sentiment
JEL Classification: G12
Suggested Citation: Suggested Citation