Asset Pricing Models and Anomalies: An Empirical Analysis

Abstract

In this paper, we find noticeable relationships between traditional factors, with evidence in favor of the B/M effect and little for the size effect. Using the Fama-Macbeth procedure, we find that the market risk premium is significantly positive, whereas the size factor is significantly negative. There is no evidence of a low volatility effect, the momentum effect is persistent and low dividend yield firms outperform firms with high dividend yields. Using the Chi-squared and GRS test, we find that the inclusion of various risk factors does lead to a fairly high proportion of variability of stock returns being explained. It also shows that the models suffer from significant pricing errors. Furthermore, the rank restriction test shows that there are several irrelevant risk factors, and most of the models used in this paper don't pass the HJ-distance test nor the LM test, except for the CAPM specification. Lastly, low volatility is priced, whereas momentum and dividend yield are not.