Equity Factor Performance Following Positive and Negative Market Returns

Do stock return anomalies perform differently after positive and negative monthly market returns? In their July 2023 paper entitled “The Market State, Mispricing and Asset Pricing Anomalies”, Michael Di Carlo and Ilias Tsiakas examine the role of the overall market state in estimating returns for stock return anomalies, specifying the market state as positive (negative) for a month when the market excess return relative to U.S. Treasury bill yield is positive (negative) the prior month. They then measure returns during each of the two states for 14 stock return anomalies, including: market beta, size, book-to-market, operating profitability, asset growth, momentum, short-term reversal, volatility, idiosyncratic volatility, correlation with the market, maximum return over the last month, maximum return over the past year, illiquidity and 1% value-at-risk. For each anomaly, they measure returns via a hedge portfolio that is each month long (short) the fifth, or quintile, of stocks with the highest (lowest) expected returns based on the relevant anomaly characteristic. Using the required monthly data for U.S. common stocks priced over $5 during August 1965 through January 2017, they find that: (more…)