Do industries matter in explaining stock returns and asset-pricing anomalies?

Pin Huang Chou, Po Hsin Ho, Kuan Cheng Ko

Research output: Contribution to journalArticlepeer-review

45 Scopus citations

Abstract

Industry returns cannot be explained fully by well-known asset pricing models. This study reveals that common factors extracted from industry returns carry significant risk premiums that go beyond the explanatory power of size, book-to-market (BM) ratios, and momentum. In particular, this study shows that (1) the small-firm effect is significant only for firms whose market capitalization is below their industry average; (2) the BM effect is an intra-industry phenomenon; (3) a one-year momentum effect is significant only for firms whose BM ratio is smaller than the industry average and limited to non-January months; and (4) there is seasonality in all effects that cannot be explained by risk-based asset-pricing models. Neither rational nor behavioral theories alone can explain industry returns, and it is perhaps too hasty to attribute asset pricing anomalies to a single driving force.

Original languageEnglish
Pages (from-to)355-370
Number of pages16
JournalJournal of Banking and Finance
Volume36
Issue number2
DOIs
StatePublished - Feb 2012

Keywords

  • Asset pricing model
  • Cross-section
  • Industry

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