Advances in Empirical Asset Pricing

• Applicants: Professor Dr. Fabian Hollstein; Professor Dr. Marcel Prokopczuk
• Subject Area: Accounting and Finance
• Term: since 2024
• Project identifier: Deutsche Forschungsgemeinschaft (DFG) - Project number 552898630

This project aims to comprehensively study empirical asset pricing anomalies. The three main research goals include a comprehensive analysis of their robustness to important methodological choices, a thorough examination of the explanations for the anomalies, and an evaluation of both anomalies and factors at the firm level rather than at the asset level. Although there are many design choices that researchers face when designing empirical asset pricing studies, these choices are often underreported and overlooked. There is no systematic and comprehensive documentation of these choices. We aim to provide such documentation based on a large number of methodological choices and a comprehensive list of previous studies. Having documented the common and uncommon choices, we then analyze their impact on the empirical results. We study a large set of prominent cross-sectional return anomalies based on a standard approach and the relevant choice combinations uncovered. On this basis, we can put all anomalies on an equal footing and assess their impact and robustness. Documenting which anomalies are robust to alternative reasonable methodological choices is important because we can then focus on finding explanations for these anomalies and ignore the others. For many of the most important anomalies, several competing explanations have been proposed in the literature. However, systematic evaluations of these different explanations are largely missing in the current literature. We intend to take advantage of the results from the first part of the project and comprehensively analyze the explanations for the economically important and robust anomalies. In the current literature, different explanations are usually analyzed only in terms of their cross-sectional effects. Our important innovation is to consider the time series dimension at the same time. Finally, both equities and corporate bonds are contingent claims on the same assets: those that make up the "firm". Structural credit models pick up on this insight and develop constraints between equity and corporate bond returns of the same firm. However, the contingent claim framework implies that the underlying economics of anomalies should operate primarily through the firm channel. Thus, both anomalies and factor models originate economically at the firm level. Following this logic, they should ideally also be studied with the entire corporate entity in mind. However, to the best of our knowledge, the literature completely lacks studies that analyze factor models and anomalies at the firm level. Therefore, this project aims to fill this gap.

• DFG Programme: Research Grants