What Drives Anomaly Returns?

88 Pages Posted: 13 Jul 2016 Last revised: 22 Aug 2019

See all articles by Lars A. Lochstoer

Lars A. Lochstoer

University of California, Los Angeles (UCLA) - Anderson School of Management

Paul C. Tetlock

Columbia Business School - Finance

Date Written: August 2019

Abstract

We decompose the returns of five well-known anomalies into cash flow and discount rate news. Common patterns emerge across the five factor portfolios and their mean-variance efficient (MVE) combination. Whereas discount rate news predominates in market returns, systematic cash flow news drives the returns of anomaly portfolios and their MVE combination with the market portfolio. Anomaly cash flow and discount rate shocks are largely uncorrelated with market cash flow and discount rate shocks and business cycle fluctuations. These rich empirical patterns restrict the joint dynamics of firm cash flows and the pricing kernel, thereby informing models of stocks' expected returns.

Keywords: anomalies, expected stock returns, efficient portfolio, present value, return decomposition, cash flow news, discount rate news

JEL Classification: G12

Suggested Citation

Lochstoer, Lars A. and Tetlock, Paul C., What Drives Anomaly Returns? (August 2019). Columbia Business School Research Paper No. 16-50; 8th Miami Behavioral Finance Conference 2017; Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2808182 or http://dx.doi.org/10.2139/ssrn.2808182

Lars A. Lochstoer (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Paul C. Tetlock

Columbia Business School - Finance ( email )

3022 Broadway
New York, NY 10027
United States

HOME PAGE: http://www0.gsb.columbia.edu/faculty/ptetlock/

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