Assessing Asset Pricing Anomalies

Michael J. Brennan and Yihong Xia
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Michael J. Brennan: University of California, Los Angeles
Yihong Xia: University of Pennsylvania

FAME Research Paper Series from International Center for Financial Asset Management and Engineering

Abstract: The optimal portfolio strategy is developed for an investor who has detected an asset pricing anomaly but is not certain that the anomaly is genuine rather than merely apparent. The analysis takes account of the fact that the parametes of both the underlying asset pricing model and the anomalous returns are estimated rather than known. The value that an investor would place on the ability to invest to exploit the apparent anomaly is also derived and illustrative calculations are presented for the Fama-French three factor model, which is anomalous relative to the CAPM.

Date: 1999-07
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