Working Paper: NBER ID: w21533
Authors: Robert F. Stambaugh; Yu Yuan
Abstract: 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 co-movement in long-short returns. Investor sentiment predicts the mispricing factors, especially their short legs, consistent with a mispricing interpretation and the asymmetry in ease of buying versus shorting. Replacing book-to-market with a single composite mispricing factor produces a better-performing three-factor model.
Keywords: Mispricing; Anomalies; Investor Sentiment; Asset Pricing Models
JEL Codes: G02; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investor sentiment (G41) | Mispricing factors (L11) |
| Investor sentiment (G41) | Short legs of mispricing factors (G19) |
| Four-factor model (C38) | Anomalies (Z13) |
| Size factor (D33) | Small-firm premium (L25) |