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Mispricing Factors

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  • Robert F. Stambaugh
  • Yu Yuan

Abstract

A four-factor model with two “mispricing” factors, in addition to market and size factors, accommodates a large set of anomalies better than notable four- and five-factor alternative models. Moreover, our size factor reveals a small-firm premium nearly twice usual estimates. The mispricing factors aggregate information across 11 prominent anomalies by averaging rankings within two clusters exhibiting the greatest return co-movement. Investor sentiment predicts the mispricing factors, especially their short legs, consistent with a mispricing interpretation and the asymmetry in ease of buying versus shorting. A three-factor model with a single mispricing factor also performs well, especially in Bayesian model comparisons.

Suggested Citation

  • Robert F. Stambaugh & Yu Yuan, 2017. "Mispricing Factors," The Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1270-1315.
    • Handle: RePEc:oup:rfinst:v:30:y:2017:i:4:p:1270-1315.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhw107
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    2. Li, Zhiyong & Wan, Yifan & Wang, Tianyi & Yu, Mei, 2023. "Factor-timing in the Chinese factor zoo: The role of economic policy uncertainty," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 85(C).
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    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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