Stock Return Anomalies Just Artifacts of Premium Volatility?
June 22, 2015 - Big Ideas
Is it misleading to view factor risk premiums (such as for market, size and value) as constant over time? In his June 2015 paper entitled “Dynamic Risk Premia and Asset Pricing Puzzles”, Andy Jia-Yuh Yeh generates time-varying (dynamic) risk premiums for the Fama-French five-factor asset pricing model and explores whether widely accepted asset pricing anomalies exist after accounting for premium dynamics. Specifically, he applies a filter “trained” by rolling 60-month histories of risk factor returns to generate time-varying series for the market, size, book-to-market, profitability and investment risk factor premiums. He then tests whether widely accepted size, value, momentum, investment, profitability, short-term reversal and long-term reversion stock return anomalies remain statistically significant after accounting for premium time variation. Using monthly returns for U.S. stock factor portfolios from Kenneth French’s library spanning January 1964 through December 2013, he finds that: Keep Reading