Information Diffusion Based Explanations of Asset Pricing Anomalies

37 Pages Posted: 11 Sep 2007

See all articles by Evangelos Sekeris

Evangelos Sekeris

Federal Reserve Banks - Federal Reserve Bank of Richmond; Federal Reserve Bank of Boston

Athanasios Bolmatis

CdR Capital

Date Written: April 2007

Abstract

In this paper we develop information based factors which outperform other popular factors used in the multifactor pricing literature such as the Fama and French size and book-to-market factors. The first factor is based on the age of an asset, measured by the number of months since the asset's IPO, while the second factor is based on the percentage of trading days an asset does not trade in a given year. Both factors attempt to capture the quality and speed of information diffusion on the market. Our information factors perform particularly well on momentum portfolios, which, Hong et al (2000) have shown to result from gradual-information diffusion. This gradual information diffusion explanation is consistent with the information argument underlying our factors, namely that, assets plagued with information problems can be miss-priced for sustained periods of time. Furthermore, our multifactor model successfully prices most industry portfolios and performs as well as the Fama and French model when pricing the 25 size/book-to-market sorted portfolios.

Suggested Citation

Sekeris, Evangelos and Bolmatis, Athanasios, Information Diffusion Based Explanations of Asset Pricing Anomalies (April 2007). FRB of Boston Quantitative Analysis Unit Working Paper No. QAU07-6. Available at SSRN: https://ssrn.com/abstract=983093 or http://dx.doi.org/10.2139/ssrn.983093

Evangelos Sekeris (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Athanasios Bolmatis

CdR Capital ( email )

11 Charles II Street
London, SW1Y 4QU
United Kingdom

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