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Do industries matter in explaining stock returns and asset-pricing anomalies?

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  • Chou, Pin-Huang
  • Ho, Po-Hsin
  • Ko, Kuan-Cheng

Abstract

Industry returns cannot be explained fully by well-known asset pricing models. This study reveals that common factors extracted from industry returns carry significant risk premiums that go beyond the explanatory power of size, book-to-market (BM) ratios, and momentum. In particular, this study shows that (1) the small-firm effect is significant only for firms whose market capitalization is below their industry average; (2) the BM effect is an intra-industry phenomenon; (3) a one-year momentum effect is significant only for firms whose BM ratio is smaller than the industry average and limited to non-January months; and (4) there is seasonality in all effects that cannot be explained by risk-based asset-pricing models. Neither rational nor behavioral theories alone can explain industry returns, and it is perhaps too hasty to attribute asset pricing anomalies to a single driving force.

Suggested Citation

  • Chou, Pin-Huang & Ho, Po-Hsin & Ko, Kuan-Cheng, 2012. "Do industries matter in explaining stock returns and asset-pricing anomalies?," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 355-370.
    • Handle: RePEc:eee:jbfina:v:36:y:2012:i:2:p:355-370
    DOI: 10.1016/j.jbankfin.2011.07.016
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    More about this item

    Keywords

    Industry; Cross-section; Asset pricing model;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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