The R&D anomaly: risk or mispricing?
The R&D anomaly: risk or mispricing?
We offer new evidence on the risk versus mispricing explanations for the R&D anomaly. Return covariance with a characteristic-based factor captures the cross-sectional return variation on R&D portfolios not explained by asset pricing models. This is consistent with both covariance risk and mispricing. Under the framework of the ICAPM, we find little economic justification that an R&D factor is a proxy for innovations to a state variable. The characteristic subsumes the factor loading in direct tests, providing support to the mispricing hypothesis. Investigating the mispricing explanation further, we reject the assertion that the R&D anomaly arises from the correction of stocks mispriced by investor sentiment. A natural experiment exploiting the pilot program under Regulation SHO shows no evidence that the anomaly persists due to limits to arbitrage in the form of short sale constraints.
R&D anomaly, covariance risk, ICAPM, mispricing
Leung, Woon Sau
73a8bf54-6035-4f11-a9ec-74272abbacb5
Evans, Kevin P.
5a8ae844-c282-45fc-9def-dd52db4a8eb1
Mazouz, Khelifa
efb38409-bd94-45ab-ba50-aa5b8640f614
19 April 2020
Leung, Woon Sau
73a8bf54-6035-4f11-a9ec-74272abbacb5
Evans, Kevin P.
5a8ae844-c282-45fc-9def-dd52db4a8eb1
Mazouz, Khelifa
efb38409-bd94-45ab-ba50-aa5b8640f614
Leung, Woon Sau, Evans, Kevin P. and Mazouz, Khelifa
(2020)
The R&D anomaly: risk or mispricing?
Journal of Banking and Finance, 115, [105815].
(doi:10.1016/j.jbankfin.2020.105815).
Abstract
We offer new evidence on the risk versus mispricing explanations for the R&D anomaly. Return covariance with a characteristic-based factor captures the cross-sectional return variation on R&D portfolios not explained by asset pricing models. This is consistent with both covariance risk and mispricing. Under the framework of the ICAPM, we find little economic justification that an R&D factor is a proxy for innovations to a state variable. The characteristic subsumes the factor loading in direct tests, providing support to the mispricing hypothesis. Investigating the mispricing explanation further, we reject the assertion that the R&D anomaly arises from the correction of stocks mispriced by investor sentiment. A natural experiment exploiting the pilot program under Regulation SHO shows no evidence that the anomaly persists due to limits to arbitrage in the form of short sale constraints.
This record has no associated files available for download.
More information
Accepted/In Press date: 14 March 2020
e-pub ahead of print date: 28 March 2020
Published date: 19 April 2020
Keywords:
R&D anomaly, covariance risk, ICAPM, mispricing
Identifiers
Local EPrints ID: 484604
URI: http://eprints.soton.ac.uk/id/eprint/484604
ISSN: 0378-4266
PURE UUID: 29a4be2e-c8d1-4980-9f90-941f93b74c00
Catalogue record
Date deposited: 17 Nov 2023 18:00
Last modified: 18 Mar 2024 04:17
Export record
Altmetrics
Contributors
Author:
Woon Sau Leung
Author:
Kevin P. Evans
Author:
Khelifa Mazouz
Download statistics
Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.
View more statistics