Multifactor Explanations of Asset Pricing Anomalies

Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the CAPM, they are called anomalies. It is found that, except for the continuation of short-term returns, the anomalies largely disappear in a 3-factor model. The results are consistent with rational ICAPM or APT asset pricing, but also considered are irrational pricing and data problems as possible explanations.