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Do industries matter in explaining stock returns and asset-pricing anomalies?

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  • Chou, Pin-Huang
  • Ho, Po-Hsin
  • Ko, Kuan-Cheng
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    Abstract

    Industry returns cannot be explained fully by well-known asset pricing models. This study reveals that common factors extracted from industry returns carry significant risk premiums that go beyond the explanatory power of size, book-to-market (BM) ratios, and momentum. In particular, this study shows that (1) the small-firm effect is significant only for firms whose market capitalization is below their industry average; (2) the BM effect is an intra-industry phenomenon; (3) a one-year momentum effect is significant only for firms whose BM ratio is smaller than the industry average and limited to non-January months; and (4) there is seasonality in all effects that cannot be explained by risk-based asset-pricing models. Neither rational nor behavioral theories alone can explain industry returns, and it is perhaps too hasty to attribute asset pricing anomalies to a single driving force.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 36 (2012)
    Issue (Month): 2 ()
    Pages: 355-370

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    Handle: RePEc:eee:jbfina:v:36:y:2012:i:2:p:355-370

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

    Related research

    Keywords: Industry; Cross-section; Asset pricing model;

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    2. Sharma, Susan Sunila & Narayan, Paresh Kumar, 2014. "New evidence on turn-of-the-month effects," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 92-108.
    3. Bianchi, Robert J. & Bornholt, Graham & Drew, Michael E. & Howard, Michael F., 2014. "Long-term U.S. infrastructure returns and portfolio selection," Journal of Banking & Finance, Elsevier, vol. 42(C), pages 314-325.
    4. Brown, Stephen J. & Lajbcygier, Paul & Wong, Woon Weng, 2012. "Estimating the cost of capital with basis assets," Journal of Banking & Finance, Elsevier, vol. 36(11), pages 3071-3079.
    5. Ben Ammar, Semir & Eling, Martin, 2013. "Common Risk Factors of Infrastructure Firms," Working Papers on Finance 1307, University of St. Gallen, School of Finance.

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