北大光华各种经济学课件-corporate finance ms market efficiency

MarketEfficiency&BehavioralFinance

MSClass3

Yu-JaneLiuMarch8,2011ThreestagesofMarketEfficiencyTestofEMHAnomaliesDebatesApplication:StrategiesMethodologiesIssuesMarketEfficiencyPart1I.ThreeStages

Stage1:Randomwalk

Grossman-Stiglitzparadox

Ifallrelevantinformationwerereflectedinmarketprices,marketagentswouldhavenoincentivetoacquiretheinformationonwhichpricesarebased.JosephStiglitzhisNobelprizein2001Stage2:TestsofMarketEfficiencyafter1975

RozeffandKinneyfoundthatJanuarystockreturnswerehigherthaninanyothermonth.GibbonsandHessreported"theMondayeffect"-stockpricestendedtogodownonMondays.Bothofthesefindingswereclearlyinconsistentwiththeweakformofmarketefficiency.GibbonsandHessnoticedthattheMondayeffectseemedtodecreaseovertime.

(theeffectwasknowntosomemarketparticipants).Stage3:MarketAnomaliesby1985Whilethemarketdidreacttoearningssurprisesquickly,thepricesalsodriftedinthedirectionoftheearningssurprisefollowingtheannouncement.Shiller:priceschangetoomuchtobejustifiedbysubsequentchangesindividends."excessvolatility".DeBondtandThaler:thestockmarkettendstooverreacttolongseriesofbadnews.II.TestsonEfficientMarketsHypothesis

Anefficientmarketisonewherepricesfullyreflectallinformationquicklyandaccurately.

RandomWalkHypothesis(RWH)TheEMHevolvedfromtheRandomWalkHypothesis(RWH).Stockpricesarerandomandthereforesomehowuncausedorirrational.Ifpricesreflectinformationquicklyandaccurately,thentheonlyinformationthatwillcausepricestochangesignificantlyisinformationthatisnotalreadyknownaboutandreflectedintheprice.Ifnewinformation,whicharrivesrandomly,isquicklyandaccuratelyreflectedinstockprices,thenstockpricesmustalsochangerandomly.IftheRWHiscorrect,thenthenotionthatpricesmoveintrends,whichcanbedetectedinchartsbytechnicalanalysis,ishighlysuspect.WeakformtestsoftheEMHTestsoftheRWHarecalledweakformtestsoftheEMHTheinformationtestedforexcessreturnsinweakformtests(andtheRWH)ismarketdataWeak-forminefficientpossibletobeatthemarketNoreputableacademicstudycandemonstratetheexistenceofexcessreturnbytradingonthebasisofhistoricalpriceandvolumedata.howeverallofthelargebrokeragefirmshirestafftechnicalanalystswhodispensetechnicaladvice.WeakformefficientTechnicalanalysis,whichreliessolelyonmarketdata,isnotuseful.Market-timingschemesshouldnotwork.Thereareanynumberofnewslettersandfinancialproductsthatclaimphenomenalexcessreturnsbeinginthemarketwhenitisgoingupandoutofthemarketwhenitisgoingdown.Withperfecttiming,largereturnsareapparentlywithinreach.Unfortunately,theevidencesuggeststhatmarkettimingdoesnotworkinapracticalsense.Problem:ifyoulookat,tenyearsofmarketdata,thevastmajorityofthetotalreturnwillcomeinonly4or5months,usuallywhenitisleastexpected.Ifyourforecastingmodelmissesevenoneortwooftheturningpoints,youveryquicklyfallbehindasimpleindexingstrategy.Semi-strongformoftheEMHMarketpricesfullyreflectallpubliclyavailableinformation.Effortstolocateundervaluedandovervaluedsecuritiesbyusingfundamentalanalysiswillnotbeprofitable.0+t-tAnnouncementDatePriceEfficientreactionOverreactionUnderreactionPricesaroundAnnouncementDateunderEMHTheeventthataffectsafirm'svaluationmaybe:1)Corpevent,theannouncementofastocksplit.2)Macroeconomicannouncement,affectthefirm'sfutureoperations

insomeway.Variouseventshavebeenexamined:mergersandacquisitionsearningsannouncementsissuesofnewdebtandequityannouncementsofmacroeconomicvariablesIPO’sdividendannouncements.etc.

Somestudiesshowthatmarketisverygoodatanticipatingandquicklyreflectingpedestrianinformationsuchasearnings,dividends,splits,mergers,etc.Ontheotherhand,thereissomeevidencethatthemarketisnottheperfectlyfunctioningmechanismsuggestedbythetheory.Cleverresearchdesigns#Stockpricereactiontoexecutivedeaths

[Johnson-Magee-Nagarajan-Newman

(1985)]Stockpricesexperienceastatisticallysignificant3.5%

increasewhenafirm’sfounderdiesunexpectedlywhileholdingatop-levelexecutive

position.Incontrast,whennon-founderseniorexecutivedeathsoccur,stockprices

fallastatisticallyinsignificant1%.Reason1:thefounderswerenotoperatingthefirm

intheshareholders’interests.Reason2:thefounder’sdeathreveals

anincreasedprobabilityoftakeover.However,theevidencesuggeststhat

takeoverexpectationsarenotresponsibleforthepositiveabnormalreturnsatthetime

ofthefounder’sdeath.theabilitytocreateabusinessisdifferentfromtheabilitytorunone.#EarningsSurprisesRendelman,Jones,andLatané(1982)studiedearningssurprisesandtheireffectonthestockprice.Theydividedtheirsampleintotengroups(deciles)accordingtohowpositiveornegativetheearningssurprisewas.Thentheycalculatedaveragedpricepathsforstocksineachdecile.Figure2presentsasummaryoftheirfindings.StrongformoftheEMHThemarketisefficientwithrespecttoallinformation,eventhatinformationthatisnotpubliclyavailable.Corporateinsidersseemtobeabletouseinsideinformationtoearnexcessreturns.Professionalmoneymanagers,suchasmutualfundandinstitutionalmanagers,seemunabletoconsistentlyoutperformthemarketaverages.Market

AnomaliesPart2TheevidencecontrarytotheEMH

Calendarpatterns-JanuaryeffectSmallfirmeffectP/E(P/B)effectOverreaction/underreactionCross-sectionalreturnpredictability

1.Calendarpatterns

Atparticularmomentsoftimesuchasthebeginningoftheweekortheturnofthemonth,stockreturnsreachabnormallevelsrecurrently.

Forinstance,thetendencyofcommonstockreturnsforearlyJanuarytobeaboveaveragedoesnotoccurmerelybychance.Itseemsthatbothinstitutionalfactors,amongwhichtheend-of-yearcashinfusionsintothemarket(Ogden,1990),andbehavioralconsiderationsaffecttradingbyindividualinvestors(cf.Sias&Starks,1997).

JanuaryeffectIthasbeenfoundthatstocksseemtodoconsistentlybetterinJanuarythanothermonths.onlyforsmallstocksTax-losssellingbyinvestorsattheendofDecember.Individualinvestorssellpoor-performingstockstorealizelossesfortaxpurposesBuyingpressureinearlyJanuaryresultsinadisproportionatesmall-firmpremium(see,e.g.,Roll,1983).Thisisnottosaythatinvestorsshouldwaituntiltheendoftheyeartorealizelosses(cf.Constantinides,1984)But,rather,thatindividualinvestorstypicallyhaveadispositiontoholdontopoor-performingstocks(Ferris,Haugen,&Makhija,1988.Ritter(1988):individualinvestorsdonotimmediatelyreinvestalloftheproceedsfromearliersalesinDecember.Hefindsthattheratioofstockpurchasestosalesbyindividualinvestorsdisplaysaseasonalpattern,withindividualshavinga

below-normalbuy/sellratioinlateDecember,whichabruptlyswitchestoanabove-normalratioinearlyJanuary.Forthatmatter,whenindividualsreinvesttheirfunds,theytypicallybuylow-pricedandlow-marketcapitalizationstocks,justastheydothroughouttheyear.Inducedbyperiodicevaluation,professionalmanagersmostlikelyrebalancetheirportfoliospriortoyear-endtoremoveembarrassment-causinglosers,whichoftenaresmall,riskystocks(cf.Haugen&Lakonishok,1988;Ritter&Chopra,1989).Then,attheturnoftheyear,ashiftofportfolioallocationstomoreaggressivestocksgeneratespricepressure,irrespectiveofwhetherthemarketisupordown2.SmallfirmeffectSmallfirmsseemtohavebeenabletoconsistentlyoutperformlargefirms,evenadjustedforrisk,from1926untilrecenttimes.Widelyknowninthe1980stherewasanimmediateproliferationofmoneymanagersandmutualfundsspecializinginsmallfirms.Result:Returnsonsmallfirmshavegenerallylaggedbigfirmsoverthelast10years-surprise!

3.P/E&P/BeffectLowP/EstockstendtodoslightlybetterthanthemarketinsubsequentperiodsandhighP/Estockstendtodoslightlyworse.Stockswithlowratiosofmarketpricepersharetobookvaluepershare(P/B)tendtodobetterinsubsequentperiodsthanstockswithhighmarket/bookratios.LowP/E(P/B)stocksgotthatwaybecausethemarketoverreacted

tosomenegativeinformation.4.OverreactionandUnderreationPersistenceofstrongormerelyweakreturnsisindicativeofaslowreactiontonewsAnunder-reactionatthemomentofitsrelease,whereasareturnreversaloracontrarymovementsuggestsanoverreactionthatissubsequentlycorrected.Theonesassociatedwithidentifiablenewsevents.Theinformationcontentofthenewscanbeinferredandalsothespeedofprocessing,thatishowmuchtimepricestaketoreflectfullyandcompletelythearrivedinformationifthereisundershootingorovershooting.#Anannouncementofacorporateeventquarterlyearnings

(e.g.,Bernard&Thomas,1990)seasonedequityoffering

(e.g.,Loughran&Ritter,1997,II:11)openmarketshare

repurchase

(e.g.,Ikenberryetal.,1995,II:12)stocksplit

(e.g.,Ikenberryetal.,1996,II:13)initiationoromissionofcashdividendpayments

(e.g.,Michaelyetal.,1995,II:14).Apredictablepost-announcementlong-runreturnsdriftinthesamedirectionastheinitialreturnsresponseisfoundthefulleconomicimpactofnewpubliccorporatefactsislargelyignoredorunder-weightedbyinvestorsintheshortrun.

strongespeciallyforout-of-favorstocks,whichtendtohavehighbook-to-marketratios.5.Cross-sectionalreturnpredictabilityParticularstocksearnpredictablehugeabnormalreturnsonaregularbasisPricesseemtobeinefficientinthesensethattheydonotfullyincorporatepastinformationavailableAprofitableinvestmentstrategycanbeimplemented.variablessuchaspriorreturnperformance,book-to-marketvalueandmarketcapitalizationdonot(sufficiently)pickupvariationinrisk.

PlausiblereasonsAfactormodelimpliesapositionofrisk.Anexampleofafactoristhemarket(return),whichcaptureseconomy-wideinfluences.Unexpectedchangeshaveanimpactonallreturns,beingstrongforsomestocksandonlyweakforsomeotherones,asexpressedbythemarketbeta.Empiricalresearchshowsthatmostfactorssufferfrommeasurementerrorandlongpublicationlags,andthattheestimatedfactorbetasoftenarenon-stationaryovertime.

DebatesbwMktEfficiencyandAnomaliesPart3I.JointtestThereisnowaytotestmarketefficiencyperse.WecanonlytestajointhypothesisWeknowwhattheintrinsicvaluesare;i.e.,wehaveaperfectassetpricingmodel.

Wheneverananomalyisfound,wedon'tknow(andhavenowayofknowing)whichpartofthisjointhypothesisdidnotwork.IIMarketmicrostructureeffects

Jensen

arguedthatanefficientmarketshouldadjustpriceswithinlimitsimposedbythecostoftrading.Ifinefficiencycannotbeexploitedforprofitnetofcosts,isthemarketreallyinefficient?Whatistheleveloftransactionalcostsatwhichwecannolongercallamarketefficientinspiteofitsbeingwithintheboundsofefficiency?Theremayalsobesomeeffectscausedbythewaysecuritypricesarereported.Atypicalresearchassumptionhasbeenthattradescanbeexecutedattheclosingpriceasrecordedbyadataprovider.III.Short-sellingissueInanefficientmarket,shortsalesareunrestricted.Inreality,70%ofmutualfundsstateintheirprospectusthattheywillneverengageinashortsale.Finn,FullerandKling:suggestthat,whileundervaluedinvestmentsarehardtocomeby,overvaluedonesaremuchmorecommon.

IV.InvestorheterogeneityOneobviousexampleistaxstatus.Tax-exempt,tax-deferred,andtaxableinvestors.Whatthenshouldtheinvestordo?IsFama-stylerationalprofitmaximizationthebest?Ifitisnot,whatelseisthere,andwhatdoesthatmeanforunderstandinghowinvestorsact?#dividendpuzzleInaperfectworldaccordingtoModiglianiandMiller,investorsshouldbeindifferentbetweendividendsandcapitalgains.Intherealworld,becauseofthestructureoftheU.S.taxsystem,rationalinvestorsshouldprefercapitalgainstodividends,andcompaniesshouldprefersharerepurchasestodividends.Mostlargecompaniesdopaydividends.Inaddition,stockpricestendtorisewhendividendsareincreasedorinitiated.V.BehavioralExplanationsMCI:Acompanywhosetickersymbolis‘MCI’andwhosepricegoesupanddownwiththe‘real’MCICeventhoughtheyarecompletelyunrelated(Rashes,M.S.(2001),‘MassivelyConfusedInvestorsMakingConspicuouslyIgnorantChoices(MCI-MCIC)’.)MomentumorP/EstrategiesinthestockmarketInternetstocksandthewholeUSmarketareovervalued#ApuzzleoftradingvolumeIfeveryoneknowsthateveryone(includinghimselforherself)isrational,theneverytradermightwonderwhatinformationthesellerhasthatthebuyerdoesn't,andviceversa.#.equitypremiumHistorically,thisbenefithasbeenmuchgreaterthancanbeexplainedbyriskalone.Futurereturnscan,atleastpartially,bepredictedas:price-earningsandprice-to-bookratios,earningssurprises,dividendchanges,orsharerepurchases.

Real-worldportfoliomanagersarestillhavingahardtimetryingtobeatthemarket.Goodperformancethisyearconsistentlyfailstopredictgoodperformancenextyear.#Criticsofbehavioralfinance:

EugeneFamaBehavioralfinanceismoreacollectionofanomaliesthanatruebranchoffinance.Theseanomalieswilleventuallybepricedoutofthemarketorexplainedbyappealtomarketmicrostructurearguments.However,adistinctionshouldbenotedbetweenindividualbiasesandsocialbiases.Theformercanbeaveragedoutbythemarket,whiletheothercancreatefeedbackloopsthatdrivethemarketfurtherandfurtherfromtheequilibriumofthe"fairprice".#CriticismsfromSteveRossTheyare‘small’Small$(e.g.,MCIJr.vs.MCI)Notscalable,e.g.,illiquidStatisticallysuspectVolatilityTestsFleeting(稍縱即逝)E.g.,thesmallstockpremium,seeSchwert[2000]NonprofitopportunitiesBid/AskspreadsInformationcosts,e.g.,complexmortgageinstruments#Howaboutthree-factormodel?Thebehaviorofstockpricesinrelationtobook-to-marketvalueandmarketcapitalizationisconsistentwiththebehaviorofearnings.Thestrongreturnsonhighbook-to-marketandsmallmarketcapitalizationstocksasarationalpremiumforrelativedistress(versusrelativestrength)thatapparentlyisrelatedtobusinessconditions.Thethree-factorrisk-returnrelationalsoabsorbsthecross-sectionalreturnsvariationrelatedtoothervaluemeasures,viz.earnings-to-price,cashflowtoprice,anddividendyield,aswellassalesgrowthandlong-termpastreturns.Conclusionitisverydifficulttoconsistentlyearnexcessreturnsbytradingonthebasisofpubliclyavailableinformation.Thoseanomaliesthathavebeenidentifiedinacademicstudiesdonotseemtobeconsistentlyexploitableinapracticalsense.Themarketissemi-strongefficientinapracticalexcessreturnsense.Applications:TradingstrategiesandDetectAnomaliesPart4ActiveandPassiveStrategiesWhethertheinvestorshouldfollowabuyandholdstrategyorattempttotimethemarketbyusingsomesortofeconomic,fundamental,ortechnicalanalysis.Whethertheinvestorshouldattempttoearnexcessreturnsbyactivelymanagingthesecurityselectionprocess.ActiveStrategiesInvolvesperiodicchangestoaportfolioinanticipationofpricemovements.Anactivelymanagedstockportfoliomightswitchitsholdingsfromgrowthstockstowardcyclicalstocksinanticipationofaneconomicexpansion.Suchaproceduregeneratesadditionalcosts,intheformofcommissions,inordertochangefromonetypeofstocktoanother.Themanagersofactivelymanagedportfoliosusuallyrelyontechnicalanalysis,fundamentalanalysis,orsomecombinationtoguidetheirportfoliochanges.Marketefficiencycastsdoubtonthepossibilitythatactivelymanagedportfolioscanconsistentlyproducesuperiorreturnsoverapassivelymanagedone.Activemanagementmustprofitenoughtopaythehighertransactionscostsassociatedwithmorefrequentbuyingandselling.IndexedportfoliosAnalternativetoactivemanagementDesignedtomimictheperformanceofsometargetindex,suchastheS&P500,Russell2,000ortheMerrillLynchCorporateMasterBondIndex.ImplicitacknowledgmentofthetruthoftheEMH.Inessence,activemanagementwon'tworkoristooexpensiveorrisky,andthatthesmartthingtodoistochoosetheno-brainerapproachofbuyingandholdinganindexfund.VI.MethodologyIssues:DissectingAnomalies

EUGENEF.FAMAandKENNETHR.FRENCH∗JF(2008)Previousworkfindsthatnetstockissues,accruals,momentum,profitability,

andassetgrowthareassociatedwith

anomalousaveragereturns.Weexplore

thepervasivenessofthesereturnanomaliesviasortsandcross-sectionregressions

estimatedseparatelyonmicrocaps,smallstocks,andbigstocks.Averagereturnsassociatedwithnetstockissues,accruals,profitability,and

assetgrowth,returnmomentumisleftunexplainedbythethree-factormodel

ofFamaandFrench(1993)aswellasbytheCAPM.Werevisitthesize,value,profitability,growth,accruals,netstockissues,

andmomentumanomalies.Eachpresentsapathtraveledbyearlierwork,but

therearegainsinstudyingthemtogethertoseewhichhaveinformationabout

averagereturnsthatismissedbytheothers.Approachesusedto

identifyanomalies(i)sortsofreturnsonanomalyvariables(ii)regressionsthatuseanomalyvariables

toexplainthecross-sectionofaveragereturns.ModelsforExpectedReturnsCAPME[Ri;t|Xt]–rf,t=βi(E[Rm,t|Xt]–rf,t),FamaandFrench(1993)(FF)3factormodelE[Ri;t|Xt]-rf,t=ai+b1i(E[Rm|Xt]-rf)t+b2iSMLt+b3iHMLt

SML:returnsonsmall(Size)portfoliominusreturnsonbigportfolio HML:returnsonhigh(B/M)portfoliominusreturnsonlowportfolio

Note:Morefactorscanbeeasilyaddedtothisad-hocmodel,forexample,amomentumfactor–see,Carhart(1997).

Sorts

Supposethattherearetwofactorsthataffectreturns:Sizeand(B/M).

Wedonotknowwhetherthereisastableorlinearrelationshipastheonespecifiedin

theFFmodel.

Howtodo?-Sortallreturnsinto10decilesaccordingtosize.-Conditionalonsize,sortreturnsintotendecilesaccordingtoBM.(Thisgivesus100portfolios.)Computetheaveragereturnofthe100portfoliosforeachperiod.Thisgivesustheexpectedreturnsofstocksgiventhecharacteristics.-Foreachstockintheeventstudy: 1)Findinwhatsizedeciletheybelong. 2)Then,findinwhatB/Mdeciletheybelong. 3)Comparethereturnofthestocktothecorrespondingportfolio return. 4)Deviationsarecalled“abnormal”return.

Fact:Sortsgivemoreconservativeresults.IfweusetheFFmethod,wetendtofindhugeabnormalreturns,whilewiththesorts,wedonot.Note:-ResultschangeifwesortfirstbyB/Mandthensize(notgood).-Resultschangeifwesortaccordingtoothercharacteristics.Themainadvantageofsorts:asimplepictureofhowaveragereturnsvary

acrossthespectrumofananomalyvariable.acommonapproachistoformequal-weight(EW)decile

portfoliosbysortingstocksonthevariableofinterest.itiscommontofocusonthehedgeportfolio

returnobtainedfromlong-shortpositionsintheextremedeciles.Apotential

problemthereturnsonEWhedgeportfoliosthatuseallstockscan

bedominatedbystocksthataretiny(microcaps,withmarketcapbelowthe20thNYSEpercentile.Microcaps

canbeinfluentialinEWhedgeportfolioreturnsfortworeasons.First,though

microcapsareonaverageonlyabout3%ofthemarketcapoftheNYSE-Amex-

NASDAQuniverse,theyaccountforabout60%ofthetotalnumberofstocks.

thecross-sectiondispersionofanomalyvariablesislargestamongmicrocaps,

sotheytypicallyaccountformorethan60%ofthestocksinextreme

sortportfolios.Tocircumventthisproblemvalue-weight(VW)hedgeportfolio

returnsareoftenshownalongwithEWreturns.ButVWhedgereturnscanbe

dominatedbyafewbigstocks,resultingagaininanunrepresentativepicture

oftheimportanceoftheanomaly.Toattacktheseproblems,weexaminetheaveragereturnsfromseparatesorts

ofmicrocaps,smallstocks,andbigstocksoneachanomalyvariablewherethe

breakpointsseparatingmicrofromsmallandsmallfrombigarethe20thand

50thpercentilesofmarketcapforNYSEstocks.SortshavetwoingsSortsareawkwardfordrawinginferencesaboutwhichanomalyvariableshaveuniqueinformationaboutaveragereturns.Multipleregressionslopesprovidedirectestimatesofmarginaleffects.Moreover,withourlargesamples,marginaleffectsaremeasuredpreciselyformanyexplanatoryvariables.diagnosticsontheregressionresidualsallowustojudgewhethertherelationsbetweenanomalyvariablesandaveragereturnsimpliedbytheregressionslopesshowupacrossthefullrangesofthevariables.regressionapproachfacespotentialproblemsregressionsestimated

onallstockscanbedominatedbymicrocapsbecausetheyaresoplentifulbecausemicrotendtohavemore

extremevaluesoftheexplanatoryvariables

andmoreextremereturns.Weavoidthisproblembyestimatingseparate

regressionsformicrocaps,smallstocks,andbigstocks,aswellasforasample

thatincludesall-but-microcapstocks.Differenceofmeanstestsontheaverage

slopesfromtheregressionsfordifferentsizegroupsthenprovideformalinferences.thereturnsonindividual

stockscanbeextreme--thepotentialforinfluentialobservationproblemsinFMregressions.Thesortsprovideacross-check.Iftheregressionsandthe

sortssuggestcontradictoryinferences,influentialobservationproblemsin

theregressionsarealikelyculprit.Thepervasivenessofanomalyreturnsacrosssizegroups,whichweaddress

withbothsortsandcross-sectionregressions,isanimportantissue.iftheextremereturns

associatedwithananomalyvariable

arespecialtomicrocaps,theyareprobablynotrealizablebecauseofthe

highcostsoftradingsuchstocks.itis

importanttoknowwhetheranomalouspatternsinreturnsare

marketwideor

limitedtoilliquidstocksthatrepresentasmallportionofmarketwealth.Procedures1.examinesabnormal

returns(averagereturnsadjustedfortheeffectsofsizeandbook-to-market

equity)fromsortsofstocksontheanomalyvariables.2.presentsthecross-sectionregressions

toidentifywhichvariables

have

informationaboutaveragereturnsmissedbytherest.ResultsTheanomalousreturnsassociatedwithnetstockissues,accruals,andmomentum

arepervasive.Theyshowupinallsizegroups(micro,small,andbig)incross-section

regressions,andtheyarealsostronginsorts,atleastintheextremes.Theasset

growthandprofitabilityanomaliesarelessrobust.Thereisanassetgrowthanomaly

inaveragereturnsonmicrocapsandsmallstocks,butitisabsentforbigstocks.Amongprofitablefirms,higherprofitabilitytendstobeassociatedwithabnormally

highreturns,butthereislittleevidencethatunprofitablefirmshaveunusuallylowreturn.Theregressionssaythatthesizeeffectowesmuchofitspowertomicrocapsandismarginalamongsmall

andbigstocks.Therelationbetweenmomentumandaveragereturnsissimilarforsmallandbigstocks,butonlyabouthalfasstrongamongmicrocaps.Thenegativerelationbetween

averagereturnsandassetgrowthispowerfulamongmicrocaps,weakerbut

statisticallyreliableamongsmallstocks,andprobablynonexistentamongbig

stocks.researcherscommonlyinterprettheaveragereturnsassociatedwith

anomalyvariablesasevidenceofmarketinefficiency.However,controllingforthebook-to-marketratio,proxiesforexpected

netcashflowswillidentifydifferencesinexpectedreturnswhethertheyaredue

toirrationalpricingorrationalrisks.Thus,evidencethatvariablesthatpredict

futurecashflowsalsopredictreturnsdoesnot,byitself,helpusdeterminehow

muchvariationin

expectedreturnsiscausedbyriskandhowmuchiscaused

bymispricing.AnIntroduction:BehavioralFinancePart51.Framing2.

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