Asset Pricing Models and Financial Market Anomalies

Abstract

This paper derives and implements a framework in which to test whether conditional asset pricing models, applied to single securities, can explain the size, value, turnover, and momentum effects in expected stock returns. In this framework individual stock betas vary with firm level size and book-to-market as well as with macroeconomic variables. The evidence shows that under the extensively studied constant beta framework, none of the models examined capture any of the size, value, turnover, and past return effects, even when returns are risk-adjusted by size, value, liquidity, and momentum factors. In contrast, when beta is allowed to vary, the size and book to market effects are often explained, but the explanatory power of turnover and past return remains robust. The past return or momentum effect is related to model mispricing that varies with macroeconomic variables, whereas turnover shows no business cycle patterns.