Size and value in China Liu, Jianan; Stambaugh, Robert F.; Yuan, Yu
Journal of financial economics,
10/2019, Volume:
134, Issue:
1
Journal Article
Peer reviewed
Open access
We construct size and value factors in China. The size factor excludes the smallest 30% of firms, which are companies valued significantly as potential shells in reverse mergers that circumvent tight ...IPO constraints. The value factor is based on the earnings-price ratio, which subsumes the book-to-market ratio in capturing all Chinese value effects. Our three-factor model strongly dominates a model formed by just replicating the Fama and French (1993) procedure in China. Unlike that model, which leaves a 17% annual alpha on the earnings-price factor, our model explains most reported Chinese anomalies, including profitability and volatility anomalies.
Mispricing Factors Stambaugh, Robert F.; Yuan, Yu
Review of financial studies/The Review of financial studies,
04/2017, Volume:
30, Issue:
4
Journal Article
Peer reviewed
Open access
A four-factor model with two "mispricing" factors, in addition to market and size factors, accommodates a large set of anomalies better than notable four- and five-factor alternative models. ...Moreover, our size factor reveals a small-firm premium nearly twice usual estimates. The mispricing factors aggregate information across 11 prominent anomalies by averaging rankings within two clusters exhibiting the greatest return co-movement. Investor sentiment predicts the mispricing factors, especially their short legs, consistent with a mispricing interpretation and the asymmetry in ease of buying versus shorting. A three-factor model with a single mispricing factor also performs well, especially in Bayesian model comparisons.
Dissecting green returns Pástor, Ľuboš; Stambaugh, Robert F.; Taylor, Lucian A.
Journal of financial economics,
November 2022, 2022-11-00, Volume:
146, Issue:
2
Journal Article
Peer reviewed
Open access
Green assets delivered high returns in recent years. This performance reflects unexpectedly strong increases in environmental concerns, not high expected returns. German green bonds outperformed ...their higher-yielding non-green twins as the “greenium” widened, and U.S. green stocks outperformed brown as climate concerns strengthened. Despite that outperformance, we estimate lower expected returns for green stocks than for brown, consistent with theory. We estimate expected returns in two ways: ex ante, using implied costs of capital, and ex post, using realized returns purged of shocks from climate concerns and earnings. A theoretically motivated green factor explains much of value stocks’ recent underperformance.
During the past few decades, the fraction of the equity market owned directly by individuals declined significantly. The same period witnessed investment trends that include the growth of indexing as ...well as shifts by active managers toward lower fees and more index-like investing. I develop an equilibrium model linking these investment trends to the decline in individual ownership, interpreting the latter as a reduction in noise trading. Active management corrects most noise trader-induced mispricing, and the fraction left unconnected shrinks as noise traders' stake in the market declines. Less mispricing then dictates a smaller footprint for active management.
Absolving beta of volatility’s effects Liu, Jianan; Stambaugh, Robert F.; Yuan, Yu
Journal of financial economics,
04/2018, Volume:
128, Issue:
1
Journal Article
Peer reviewed
Open access
The beta anomaly, negative (positive) alpha on stocks with high (low) beta, arises from beta’s positive correlation with idiosyncratic volatility (IVOL). The relation between IVOL and alpha is ...positive among underpriced stocks but negative and stronger among overpriced stocks (Stambaugh, Yu, and Yuan, 2015). That stronger negative relation combines with the positive IVOL-beta correlation to produce the beta anomaly. The anomaly is significant only within overpriced stocks and only in periods when the beta-IVOL correlation and the likelihood of overpricing are simultaneously high. Either controlling for IVOL or simply excluding overpriced stocks with high IVOL renders the beta anomaly insignificant.
Sustainable investing in equilibrium Pástor, Ľuboš; Stambaugh, Robert F.; Taylor, Lucian A.
Journal of financial economics,
November 2021, 2021-11-00, 20211101, Volume:
142, Issue:
2
Journal Article
Peer reviewed
Open access
We model investing that considers environmental, social, and governance (ESG) criteria. In equilibrium, green assets have low expected returns because investors enjoy holding them and because green ...assets hedge climate risk. Green assets nevertheless outperform when positive shocks hit the ESG factor, which captures shifts in customers’ tastes for green products and investors’ tastes for green holdings. The ESG factor and the market portfolio price assets in a two-factor model. The ESG investment industry is largest when investors’ ESG preferences differ most. Sustainable investing produces positive social impact by making firms greener and by shifting real investment toward green firms.
This study explores the role of investor sentiment in a broad set of anomalies in cross-sectional stock returns. We consider a setting in which the presence of market-wide sentiment is combined with ...the argument that overpricing should be more prevalent than underpricing, due to short-sale impediments. Long-short strategies that exploit the anomalies exhibit profits consistent with this setting. First, each anomaly is stronger (its long-short strategy is more profitable) following high levels of sentiment. Second, the short leg of each strategy is more profitable following high sentiment. Finally, sentiment exhibits no relation to returns on the long legs of the strategies.
Buying is easier than shorting for many equity investors. Combining this arbitrage asymmetry with the arbitrage risk represented by idiosyncratic volatility (IVOL) explains the negative relation ...between IVOL and average return. The IVOL-return relation is negative among overpriced stocks but positive among underpriced stocks, with mispricing determined by combining 11 return anomalies. Consistent with arbitrage asymmetry, the negative relation among overpriced stocks is stronger, especially for stocks less easily shorted, so the overall IVOL-return relation is negative. Further supporting our explanation, high investor sentiment weakens the positive relation among underpriced stocks and, especially, strengthens the negative relation among overpriced stocks.
Extremely long odds accompany the chance that spurious-regression bias accounts for investor sentiment׳s observed role in stock-return anomalies. We replace investor sentiment with a simulated ...persistent series in regressions reported by Stambaugh, Yu, and Yuan (2012), who find higher long-short anomaly profits following high sentiment, due entirely to the short leg. Among 200 million simulated regressors, we find none that support those conclusions as strongly as investor sentiment. The key is consistency across anomalies. Obtaining just the predicted signs for the regression coefficients across the 11 anomalies examined in the above study occurs only once for every 43 simulated regressors.
Scale and skill in active management Pástor, Ľuboš; Stambaugh, Robert F.; Taylor, Lucian A.
Journal of financial economics,
04/2015, Volume:
116, Issue:
1
Journal Article
Peer reviewed
We empirically analyze the nature of returns to scale in active mutual fund management. We find strong evidence of decreasing returns at the industry level. As the size of the active mutual fund ...industry increases, a fund׳s ability to outperform passive benchmarks declines. At the fund level, all methods considered indicate decreasing returns, though estimates that avoid econometric biases are insignificant. We also find that the active management industry has become more skilled over time. This upward trend in skill coincides with industry growth, which precludes the skill improvement from boosting fund performance. Finally, we find that performance deteriorates over a typical fund׳s lifetime. This result can also be explained by industry-level decreasing returns to scale.
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