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A common pattern across asset pricing anomalies

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  • Božović, Miloš

Abstract

The Arbitrage Pricing Theory implies that portfolios with small R2 should have large alphas. We show that, as a consequence, the prominent asset pricing anomalies share a common trait: abnormal returns are driven mainly by stocks having smaller and less stable correlations with the market portfolio. Univariate sorts based on five-year rolling-window correlations with the market excess return produce patterns similar to those based on size, value, profitability, investment, price ratios, and earnings and price momenta. A correlation-driven factor that captures this common property makes some of the Fama–French factors redundant in regressions with the univariate sorts.

Suggested Citation

  • Božović, Miloš, 2022. "A common pattern across asset pricing anomalies," Finance Research Letters, Elsevier, vol. 48(C).
    • Handle: RePEc:eee:finlet:v:48:y:2022:i:c:s154461232200246x
    DOI: 10.1016/j.frl.2022.103004
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    References listed on IDEAS

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    More about this item

    Keywords

    Asset pricing; Factor models; Risk premia; Fama–French factors; Dynamic correlations;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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