Disentangling Anomalies: Risk Versus Mispricing

Fisher College of Business Working Paper No. 2020-03-029

Charles A. Dice Working Paper No. 2020-29

62 Pages Posted: 1 Dec 2020 Last revised: 3 Aug 2023

See all articles by Justin Birru

Justin Birru

Ohio State University (OSU) - Department of Finance

Hannes Mohrschladt

University of Muenster - Finance Center

Trevor Young

Tulane University - A.B. Freeman School of Business

Date Written: August 1, 2023

Abstract

We examine the cross-section of returns from the perspective of a benchmark model that only includes systematic mispricing factors. In contrast to insight revealed by standard benchmark models, we recover robust positive risk-return relations for many cross-sectional risk, distress, and friction proxies. Our findings are consistent with systematic mispricing that primarily affects speculative stocks and predominantly results in overpricing, predicting lower returns. Hence, failing to control for exposure to systematic mispricing can bias tests of risk-return tradeoffs. Overall, our evidence suggests that a small shift in perspective generates a substantially different interpretation of the same data.

Keywords: low-risk anomalies, mispricing, sentiment, risk, distress, frictions

JEL Classification: G12, G14, D84

Suggested Citation

Birru, Justin and Mohrschladt, Hannes and Young, Trevor, Disentangling Anomalies: Risk Versus Mispricing (August 1, 2023). Fisher College of Business Working Paper No. 2020-03-029, Charles A. Dice Working Paper No. 2020-29, Available at SSRN: https://ssrn.com/abstract=3739944 or http://dx.doi.org/10.2139/ssrn.3739944

Justin Birru (Contact Author)

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Hannes Mohrschladt

University of Muenster - Finance Center ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/en/the-fcm/lsf/team/hannes-mohrschladt

Trevor Young

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

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