Asset pricing models and financial market anomalies, Working paper, forthcoming in Review of Financial Studies

This article develops a framework that applies to single securities to test whether asset pricing models can explain the size, value, and momentum anomalies. Stock level beta is allowed to vary with firm-level size and book-to-market as well as with macroeco-nomic variables. With constant beta, none of the models examined capture any of the market anomalies. When beta is allowed to vary, the size and value effects are often explained, but the explanatory power of past return remains robust. The past return effect is captured by model mispricing that varies with macroeconomic variables. The capital asset pricing model (CAPM) of Sharpe (1964) and Lintner (1965) has long been a basic tenet of finance. However, subsequent wor