Asset Pricing Anomalies
Friday, Jan. 4, 2019 8:00 AM - 10:00 AM
- Chair: Joseph Engelberg, University of California-San Diego
What You See Is Not What You Get: The Costs of Trading Market Anomalies
AbstractIs 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
AbstractWhat 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.
London School of Economics
AQR Capital Management
- G1 - General Financial Markets