A Quantum Leap in Asset Pricing: Explaining Anomalous Returns

74 Pages Posted: 31 Oct 2023 Last revised: 18 Feb 2024

See all articles by James W. Kolari

James W. Kolari

Texas A&M University - Department of Finance

Jianhua Z. Huang

The Chinese University of Hong Kong

Wei Liu

Texas A&M University - Department of Finance

Huiling Liao

University of Minnesota - Twin Cities - School of Public Health

Date Written: October 3, 2023

Abstract

We utilize open source datasets of anomaly portfolios to conduct cross-sectional
regression tests of alternative asset pricing models. Out-of-sample analyses show
that a recently proposed model dubbed the ZCAPM well outperforms leading
multifactor models in terms of factor loading significance and goodness-of-fit. Also,
the ZCAPM markedly outperforms multifactor models in graphical analyses of
pricing errors that compare realized returns to predicted returns on an out-of-sample
basis. Further subperiod analyses corroborate these findings. Consistent with the efficient market hypothesis, the ZCAPM does a good job of explaining large numbers of anomaly portfolios’ returns on an out-of-sample basis.

Keywords: asset pricing models, cross-sectional tests, mispricing error, ZCAPM

JEL Classification: G12, C20

Suggested Citation

Kolari, James W. and Huang, Jianhua Z. and Liu, Wei and Liao, Huiling, A Quantum Leap in Asset Pricing: Explaining Anomalous Returns (October 3, 2023). Available at SSRN: https://ssrn.com/abstract=4591779 or http://dx.doi.org/10.2139/ssrn.4591779

James W. Kolari (Contact Author)

Texas A&M University - Department of Finance ( email )

MS-4218
Department of Finance
College Station, TX TX 77843-4218
United States
979-845-4803 (Phone)
979-845-3884 (Fax)

Jianhua Z. Huang

The Chinese University of Hong Kong ( email )

Wei Liu

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States

Huiling Liao

University of Minnesota - Twin Cities - School of Public Health ( email )

15-223 Phillips-Wangensteen Building
Box 729, 420 Delaware Street SE
Minneapolis, MN 55455-0392
United States
9794027525 (Phone)

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