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Anatomy of the Market: A Body-Tail Test of Factor Models

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  • Useong Shin

Abstract

I ask whether a factor model that prices the aggregate market also prices the market's internal components. I construct a CRSP investible market portfolio and split it into size-ranked body and tail legs that exactly recombine to the market. All models pass the aggregate market test. Yet q5 leaves systematic, offsetting alphas: negative in the body and positive in the tail. Random splits remove the rejection. The evidence suggests that the market can appear priced because internal pricing errors cancel.

Suggested Citation

  • Useong Shin, 2026. "Anatomy of the Market: A Body-Tail Test of Factor Models," Papers 2606.23596, arXiv.org.
    • Handle: RePEc:arx:papers:2606.23596
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