Examining Asset Pricing Anomalies: Evidence from Europe

We examine five important asset pricing anomalies, namely, size, value, momentum, profitability, and investment rate to evaluate their efficacy in major West European economies, that is, France, Germany, Italy, and Spain. We employ four prominent asset pricing models, namely Capital Asset Pricing Model (CAPM), Fama–French three-factor (FF3) model, Carhart model and Fama–French five-factor (FF5) model to evaluate whether portfolio managers can create trading strategies to generate risk-adjusted extra normal returns for their investors. We also examine the prominent anomalies which pass the test of asset pricing in our sample countries and evaluate the best performing asset pricing model in explaining returns in each of these countries. We find that in spite of being matured markets, these countries provide portfolio managers with opportunities to exploit these strategies to generate extra normal returns for their investors. Momentum anomaly for Germany and profitability anomaly for Italy can be exploited by fund managers for generating risk-adjusted returns. For France, except for net investment rate anomaly, all the other anomalies remained unexplained by asset pricing models. We also find CAPM to be the better model in explaining returns of Italy and Spain. While FF3 factor and FF5 factor models explain returns in Germany, our sample asset pricing models failed to work for France. Our study has implications for portfolio managers, academia, and policymakers.

Mutual fund performance: Some recent evidence from European equity funds

This paper studies the performance of mutual funds that specialise in equity investment. We use a sample of the top sixteen actively managed European equity funds operating in the United States between July 1990 and November 2020. Using standard factor models, we show that none of our sample funds generated a positive and significant alpha. The observed funds could not outperform a simple passive strategy that involves tradeable European benchmark portfolios in the longer run. As a rule, the funds in our sample did not exploit the known asset pricing anomalies.

Hedge Funds, Arbitrage, and Timing

This paper is an extension of the work of Lawson and Schwartz (2018) which analyzes the risk-adjusted performance of hedge funds by employing a collection of four, five, seven, and eight-factor models. The purpose is to evaluate how well the top and bottom performing subset of hedge fund strategies have profited on known asset pricing anomalies during two unique time periods, 1994 to 2000 and 2001 to 2008. The bifurcation of the data into two distinct periods allows for a deeper exploration of the potential time-varying significance of estimated factor arbitrage. Our empirical testing suggests that both the top and bottom performing funds did utilize the asset growth anomaly to generate abnormal profits. Top performers tended to invest with a long emphasis on low asset growth, value firms while the bottom-five performing hedge fund strategies tested positive for a predilection towards going long small firms with low asset growth characteristics. Arguably, these outcomes probably align with the nature of the investment philosophy of each fund strategy. Interestingly, however, the time-varying significance of estimated coefficients for the value and returns momentum factors between the two distinct timeframes suggests either intentional or unintentional rotation between the use of available pricing anomalies and risk premiums.

The Unintended Impact of Academic Research on Asset Returns: The Capital Asset Pricing Model Alpha

This paper explores a channel whereby asset-pricing anomalies can appear as investors alter portfolios according to findings in academic research. In particular, I find that assets with low realized capital asset pricing model (CAPM) alphas outperform those with high alphas, but this finding only appears after the CAPM’s publication in the 1960s. I find evidence consistent with the widespread application of the CAPM generating incentives to tilt portfolios systematically away from low CAPM alpha assets, causing such assets to be undervalued. This paper was accepted by Kay Giesecke, finance.

The Small-Sized Premium: Is It Really Relevant? Evidence from the European Equity Market

The valuation of a company reflects the expected return or equivalently, the cost of capital that investors demand in exchange for the risk assumed. Despite the ex-ante nature of the problem, the majority of empirical analysis has focused on factors explaining expected returns from an ex-post perspective. In this paper, we take a different approach and try to identify which factors are ex-ante included in discount rates, with particular attention to the so-called size premium. Starting from observed market capitalisations and company fundamentals, we obtain the implied cost of capital from the reverse engineering of a carefully designed fundamental valuation model. Panel data regressions are used to investigate the existence of a relation between the implied cost of capital and the firm’s size, including other control variables representative of the most cited asset pricing “anomalies”. Our sample comprises European non-financial stocks listed on primary markets, with half-yearly observations starting from the aftermath of the 2008 global financial crisis. Contrary to common wisdom, we find that the firm’s size has no tangible impact to explain the implied cost of capital.