One Anomaly to Explain Them All

62 Pages Posted: 7 Sep 2019

See all articles by Jack Y Favilukis

Jack Y Favilukis

University of British Columbia (UBC) - Division of Finance

Terry Zhang

Australian National University (ANU)

Date Written: August 28, 2019


We argue that conditional on the existence of momentum, many other asset pricing anomalies are not particularly anomalous. First, empirically, we show that portfolios within which conditional momentum strategies (ie buying winners and selling losers) are unprofitable, tend to have significantly higher unconditional average returns than portfolios within which momentum strategies are profitable. Second, we rationalize this in a standard model to which we add momentum; the intuition is that assets with more conditional trading opportunities are bid up by speculators and tend to have higher prices and lower unconditional returns. Third, we show that for many asset pricing anomalies, a momentum strategy tends to be unprofitable within the long leg, but profitable within the short leg. Thus, according to our model, the long leg should earn higher unconditional average returns, which explains the anomaly. Once accounting for this effect, the average Fama French 3 factor alpha across 36 prominent anomalies falls by up to 47%. Finally, we show that although the CAPM beta is negatively related to the average unconditional return of a large set of portfolios, it is strongly positively related to the average conditional return of the same set of portfolios, which helps explain the apparent empirical failure of the CAPM.

Suggested Citation

Favilukis, Jack Y and Zhang, Terry, One Anomaly to Explain Them All (August 28, 2019). Available at SSRN: or

Jack Y Favilukis (Contact Author)

University of British Columbia (UBC) - Division of Finance ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2

Terry Zhang

Australian National University (ANU) ( email )

Canberra, Australian Capital Territory 2601

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