What Drives Anomaly Returns?
74 Pages Posted: 13 Jul 2016 Last revised: 19 Apr 2018
Date Written: April 11, 2018
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
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