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Testing the q-Theory of Anomalies

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  • Toni M. Whited
  • Lu Zhang

    ()
    (Simon School of Business University of Rochester)

Abstract

The q-theory explanations of asset pricing anomalies are quantitatively important. We perform a new asset pricing test by using GMM to minimize the difference between average stock returns in the data and average investment returns constructed from observable firm characteristics. Under various specifications, the model-implied average returns display similar magnitudes of dispersion across portfolios sorted on investment-to-asset and on size and book-to-market. But the predicted dispersions in average returns among portfolios sorted on earnings surprises are somewhat smaller in magnitude than those observed in the data

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File URL: http://repec.org/sed2006/up.20259.1139891979.pdf
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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2006 Meeting Papers with number 380.

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Date of creation: 03 Dec 2006
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Handle: RePEc:red:sed006:380

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Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
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Keywords: q-theory; asset pricing anomalies; structural estimation;

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References

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  1. Whited, Toni M, 1998. "Why Do Investment Euler Equations Fail?," Journal of Business & Economic Statistics, American Statistical Association, vol. 16(4), pages 479-88, October.
  2. Restoy, Fernando & Rockinger, G Michael, 1994. " On Stock Market Returns and Returns on Investment," Journal of Finance, American Finance Association, vol. 49(2), pages 543-56, June.
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  7. Timothy Erickson & Toni M. Whited, 2000. "Measurement Error and the Relationship between Investment and q," Journal of Political Economy, University of Chicago Press, vol. 108(5), pages 1027-1057, October.
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  17. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  18. Tobin, James, 1969. "A General Equilibrium Approach to Monetary Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 1(1), pages 15-29, February.
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