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In good and in bad times? The relation between anomaly returns and market states

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  • Müller, Sebastian
  • Preissler, Fabian

Abstract

We evaluate the relation between various anomalies/factors and market conditions using a global set of 56 equity markets. The cross-section of anomalies performs significantly better during unfavorable market states: The value-weighted daily four-factor alpha of anomaly long-short portfolios is 1.7 bps in bad times while it amounts to 1.0 bps in good times. About 75.0% of the performance gain in bad times can be attributed to the anomaly short side. Findings remain robust considering alternative definitions of market conditions, including recessions, controlling for sentiment, and across anomaly categories or regions. The results underscore the overall importance of mispricing in explaining anomalies.

Suggested Citation

  • Müller, Sebastian & Preissler, Fabian, 2026. "In good and in bad times? The relation between anomaly returns and market states," Journal of Banking & Finance, Elsevier, vol. 190(C).
    • Handle: RePEc:eee:jbfina:v:190:y:2026:i:c:s0378426626001202
    DOI: 10.1016/j.jbankfin.2026.107746
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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