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Does Risk Explain Anomalies? Evidence from Expected Return Estimates

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  • Jin Ginger Wu
  • Lu Zhang
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Abstract

We construct accounting-based costs of equity for dollar neutral long-short trading strategies formed on a comprehensive list of anomaly variables. These variables include 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, cost of equity estimates differ dramatically from average realized returns. If accounting-based costs of equity are reasonable proxies for expected returns, the evidence implies that returns of most anomalies are unexpected, and that mispricing, not risk, is the main driving force of capital markets anomalies.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15950.

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Date of creation: Apr 2010
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Handle: RePEc:nbr:nberwo:15950

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