Abstract
This paper compares the ability of three-factor and five-factor asset pricing models to explain the apparent profitability of a broad selection of anomalies in Australian equity returns. Rather than examining the fit of each model to common test portfolios, our focus is on the spread return to long-short trading strategies designed around so-called anomalies. After documenting significant spread returns to 16 anomalies (including several not previously studied in Australia), the empirical analysis provides cautious support that the recently-proposed investment and profitability factors have a role to play. The number of anomalies that remains after risk adjustment decreases under the five-factor model. Further, while the magnitude of reduction in alpha is modest, our testing shows that it is statistically significant in many cases. However, both three-factor and five-factor models repeatedly fail the Gibbons, Ross, and Shanken's (1989) (GRS) test, suggesting that the quest for a better asset pricing model is not yet complete.
Original language | English |
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Pages (from-to) | 123-135 |
Number of pages | 13 |
Journal | International Review of Finance |
Volume | 18 |
Issue number | 1 |
DOIs | |
Publication status | Published - Mar 2018 |