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Multifactor Explanations of Asset Pricing Anomalies

Eugene F. Fama and Kenneth R. FrencH
The Journal of Finance
Vol. 51, No. 1 (Mar., 1996), pp. 55-84
Published by: Wiley for the American Finance Association
DOI: 10.2307/2329302
Stable URL: http://www.jstor.org/stable/2329302
Page Count: 30
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Multifactor Explanations of Asset Pricing Anomalies
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Abstract

Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, book-to-market equity, past sales growth, long-term past return, and short-term past return. Because these patterns in average returns apparently are not explained by the CAPM, they are called anomalies. We find that, except for the continuation of short-term returns, the anomalies largely disappear in a three-factor model. Our results are consistent with rational ICAPM or APT asset pricing, but we also consider irrational pricing and data problems as possible explanations.

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