Asset Pricing Anomalies and the Low-Risk Puzzle

Abstract

The original observation in Black, Jensen and Scholes (1972) that the security market line is too flat – the beta anomaly – is a driving force behind a number of well-documented cross-sectional asset pricing puzzles. I document that returns to a broad set of anomaly portfolios are negatively correlated with the contemporaneous market excess return. I show that this negative covariance implicitly embeds the beta anomaly in these cross-sectional return puzzles. Taking into account the exposure to the beta anomaly attenuates the economic and statistical significance of the risk-adjusted returns to a large set of asset pricing anomalies.

Keywords: Beta anomaly, cross-sectional stock returns

JEL Classification: G12