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Asset Pricing Anomalies

Paper Session

Friday, Jan. 4, 2019 8:00 AM - 10:00 AM

Hilton Atlanta, 205-206-207
Hosted By: American Finance Association
  • Chair: Joseph Engelberg, University of California-San Diego

Mispricing Premia

Todd Hazelkorn
,
AQR Capital Management
Tobias Moskowitz
,
Yale University
Kaushik Vasudevan
,
Yale University

Abstract

While deviations from the law of one price between futures and spot prices, known as bases, have been interpreted as mispricing, we find that they also predict future returns in the underlying spot market. This "mispricing premium" is found in global equity and currency markets, indicating that bases contain conditional information about expected returns in these markets. Specifically, pricing violations arise from a combination of costly financial intermediation and end-user demand for leveraged asset exposure, which increases asset-specific financing costs. At the same time, demand for leveraged exposure to an asset is associated with liquidity demand for the underlying asset. The basis, therefore, provides information about both the financing costs and liquidity demand for an asset. The mispricing return premium reflects compensation to liquidity providers for meeting demand in these markets. Our results highlight that deviations from the law of one price reflect more than financing frictions, providing information about underlying asset demand related to expected returns.

What You See Is Not What You Get: The Costs of Trading Market Anomalies

Andrew Patton
,
Duke University
Brian Weller
,
Duke University

Abstract

Is there a gap between the profitability of a trading strategy “on paper” and that which is achieved in practice? We answer this question by developing a general technique to measure the real-world implementation costs of financial market anomalies. Our method extends Fama-MacBeth regressions to compare the on-paper returns to factor exposures with those achieved by mutual funds. Unlike existing approaches, our approach delivers estimates of all-in implementation costs without relying on parametric microstructure models or explicitly specified factor trading strategies. After accounting for implementation costs, typical mutual funds earn low returns to value and no returns to momentum.

Turning Alphas into Betas: Arbitrage and the Cross-Section of Risk

Thummim Cho
,
London School of Economics

Abstract

What determines the cross-section of betas with respect to a risk factor? The act of arbitrage plays an important role. If the capital of arbitrageurs loads on a systematic factor, the assets traded by the arbitrageurs gain different sensitivities to that factor, depending on the asset positions taken by the arbitrageurs. I develop predictions about such “arbitrage-driven” betas in a model of constrained arbitrage and test them in the cross-section of equity anomalies. The arbitrage channel accounts for a substantial part of the cross-sectional variation in equity anomalies’ betas in intermediary-based
and multifactor asset pricing models.
Discussant(s)
Christopher Polk
,
London School of Economics
Andrea Frazzini
,
AQR Capital Management
Kent Daniel
,
Columbia University
JEL Classifications
  • G1 - General Financial Markets