What Drives Anomaly Returns?

74 Pages Posted: 13 Jul 2016 Last revised: 19 Apr 2018

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: April 11, 2018

Abstract

We decompose the returns of five well-known anomalies into cash flow and discount rate news. Common patterns emerge across all factor portfolios and their mean-variance efficient combination. The main source of anomaly return variation is news about cash flows. Anomaly cash flow and discount rate components are strongly negatively correlated, and this negative correlation is driven by news about long-run cash flows. Interestingly, anomaly cash flow (discount rate) news is approximately uncorrelated with market cash flow (discount rate) news. These rich empirical patterns are useful for guiding specifications of asset pricing models and evaluating myriad theories of anomalies.

Keywords: Anomalies, expected stock returns, efficient portfolio, present value, return decomposition

JEL Classification: G12

Suggested Citation

Lochstoer, Lars A. and Tetlock, Paul C., What Drives Anomaly Returns? (April 11, 2018). Columbia Business School Research Paper No. 16-50; 8th Miami Behavioral Finance Conference 2017. 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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