Do relative leverage and relative distress really explain size and book-to-market anomalies?

Pin-Huang Chou, Kuan-Cheng Ko and Shinn-Juh Lin

Journal of Financial Markets, 2010, vol. 13, issue 1, 77-100

Abstract: In a capital asset pricing model (CAPM) framework, Ferguson and Shockley [2003. Equilibrium "anomalies". Journal of Finance 58, 2549-2580] propose two factors constructed on relative leverage and relative distress, and show that the two factors subsume Fama and French's [1993. Common risk factors in the returns on stocks and bonds. Journal of Financial Economics 33, 3-56] factors constructed on size and book-to-market (BM) in explaining the cross-sectional average returns of the 25 size-BM portfolios. Based on tests on individual securities, we find that all factors fail to fully explain the common asset-pricing anomalies. In the spirit of Merton's [1973. An intertemporal capital asset pricing model. Econometrica 41, 867-887] intertemporal CAPM, we propose an augmented five-factor model, which incorporates Ferguson and Shockley's [2003. Equilibrium "anomalies". Journal of Finance 58, 2549-2580] factors into the Fama-French three-factor model. The empirical results show that a simple conditional version of the augmented model is able to explain most well-known asset-pricing anomalies.

Keywords: Anomalies; Asset; pricing; Equilibrium; anomalies; Relative; distress; Relative; leverage (search for similar items in EconPapers)
Date: 2010
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1386-4181(09)00044-5
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:13:y:2010:i:1:p:77-100

Access Statistics for this article

Journal of Financial Markets is currently edited by B. Lehmann, D. Seppi and A. Subrahmanyam

More articles in Journal of Financial Markets from Elsevier
Bibliographic data for series maintained by Catherine Liu ().