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

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: November 30, 2020

Abstract

Systematic mispricing primarily affects speculative stocks and tends to take the form of overpricing, predicting lower average returns. Because speculative stocks are typically deemed risky by rational models, failing to control for exposure to systematic mispricing can bias tests of risk-return tradeoffs. Controlling for the effects of systematic mispricing, we recover robust positive risk-return relations for a large number of cross-sectional risk proxies, including many low-risk and distress anomalies. We also recover robust positive illiquidity-return relations. We provide a unifying framework to explain a number of puzzles arising from the empirical failure of standard asset-pricing models and show that risk-return relations supporting rational models can be recovered from the data by accounting for the existence of time-varying common mispricing.

Keywords: systematic risk, anomalies, mispricing, sentiment, beta, illiquidity, low-risk anomalies, distress

JEL Classification: G12, G14, D84

Suggested Citation

Birru, Justin and Mohrschladt, Hannes and Young, Trevor, Disentangling Anomalies: Risk Versus Mispricing (November 30, 2020). 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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