Asset pricing model uncertainty

This paper provides a unified calendar-time portfolio methodology for assessing whether returns following an event are abnormal which efficiently handles asset pricing model uncertainty and allows for time-varying alpha and factor exposures. The approach disciplines researchers’ use of asset pricing factors and assigns a probability measure to the appropriateness of (dynamically) selecting a single model that best approximates the true factor structure or whether model averaging across an asset pricing universe is desired. It is applied to the long-horizon effect of dividend initiations and resumptions in the 1980 to 2015 period. Resulting post-announcement conditional abnormal returns are generally significant, statistically and economically, which contrasts recent evidence, and exhibits a break in mean from positive until the mid-1990s and negative onwards. We document substantial time-variation in the dimensionality and composition of the factor structure in expected returns, which goes beyond what captured by conditional versions of the CAPM and Fama–French specifications. This also generalizes to a large panel of 202 characteristics-sorted portfolios.