Abstract
Returns to pure play strategies, estimated as Fama-MacBeth slope coefficients on standardized size, value and momentum characteristics, have positive and significant four factor alphas. The mispricing of these characteristics-based strategies by the four factor model is due in part, but not entirely, to (1) the effect of microcap stocks on the pure play returns and (2) the effect of stale book and market capitalization information on the SMB and HML factors. Adjusting for these issues, the value and momentum pure play strategies still have positive and significant four factor alphas. We examine thirteen reported anomalies and find that five have insignificant alphas when the pure play returns are used as factors. Eight are insignificant when an interaction between size and value characteristics is included as a factor.
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