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

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  • Chou, Pin-Huang
  • Ko, Kuan-Cheng
  • Lin, Shinn-Juh
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    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Markets.

    Volume (Year): 13 (2010)
    Issue (Month): 1 (February)
    Pages: 77-100

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    Handle: RePEc:eee:finmar:v:13:y:2010:i:1:p:77-100

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    Web page: http://www.elsevier.com/locate/finmar

    Related research

    Keywords: Anomalies Asset pricing Equilibrium anomalies Relative distress Relative leverage;

    References

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