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Mispricing Factors

Robert F. Stambaugh1; Yu Yuan2

1 The Wharton School, University of Pennsylvania and NBER · 2 Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University and Wharton Financial Institutions Center

Review of Financial Studies 2017 open access

A four-factor model with two "mispricing" factors, in addition to market and size factors, accommodates a large set of anomalies better than notable four-and five-factor alternative models. Moreover, our size factor reveals a small-firm premium nearly twice usual estimates. The mispricing factors aggregate information across 11 prominent anomalies by averaging rankings within two clusters exhibiting the greatest return co-movement. Investor sentiment predicts the mispricing factors, especially their short legs, consistent with a mispricing interpretation and the asymmetry in ease of buying versus shorting. A three-factor model with a single mispricing factor also performs well, especially in Bayesian model comparisons. (JEL G12)

DOI
10.1093/rfs/hhw107
Volume
30 (4)
Pages
1270-1315
Language
en
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