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Does Risk Explain Anomalies? Evidence from Expected Return Estimates

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  • Wu, Jin (Ginger)

    (University of Georgia)

  • Zhang, Lu

    (Ohio State University)

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Abstract

Average realized returns equal average expected returns plus average unexpected returns. If anomalies are driven by risk, average expected returns should be close to average realized returns. If anomalies are driven by mispricing, unexpected returns should be more important. We estimate accounting-based expected returns to zero-cost trading strategies formed on anomaly variables such as book-to-market, size, composite issuance, net stock issues, abnormal investment, asset growth, investment-to-assets, accruals, earnings surprises, failure probability, return on assets, and short-term prior returns. Our findings are striking. Except for the value premium, expected return estimates differ dramatically from average return estimates. The evidence suggests that mispricing, not risk, is the main driving force of capital markets anomalies.

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File URL: http://www.cob.ohio-state.edu/fin/dice/papers/2010/2010-18.pdf
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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2010-18.

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Date of creation: Oct 2010
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Handle: RePEc:ecl:ohidic:2010-18

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