A common pattern across asset pricing anomalies

Miloš Božović

Finance Research Letters, 2022, vol. 48, issue C

Abstract: The Arbitrage Pricing Theory implies that portfolios with small R2 should have large alphas. We show that, as a consequence, the prominent asset pricing anomalies share a common trait: abnormal returns are driven mainly by stocks having smaller and less stable correlations with the market portfolio. Univariate sorts based on five-year rolling-window correlations with the market excess return produce patterns similar to those based on size, value, profitability, investment, price ratios, and earnings and price momenta. A correlation-driven factor that captures this common property makes some of the Fama–French factors redundant in regressions with the univariate sorts.

Keywords: Asset pricing; Factor models; Risk premia; Fama–French factors; Dynamic correlations (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:48:y:2022:i:c:s154461232200246x

DOI: 10.1016/j.frl.2022.103004

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