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

  • Chou, Pin-Huang
  • Ho, Po-Hsin
  • Ko, Kuan-Cheng
Registered author(s):

    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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    File URL: http://www.sciencedirect.com/science/article/pii/S0378426611002275
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    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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