New return anomalies and new-Keynesian ICAPM☆☆☆

a r t i c l e i n f o I propose a new multi-factor asset pricing model with new-Keynesian factors to explain stock return anomalies from 1972Q1 to 2009Q2. This new model explains the average returns across testing portfolios formed on financial distress, momentum, and standardized unexpected earnings with misspecification-robust statistics. Test portfolios formed on net stock issues and total accruals are also partly explained by new-Keynesian factors. Two monetary policy factors play an important role in explaining these new anomalies. The credit aspect of these new anomalies suggests an economic rationale for the model through capital market imperfections and the credit channel of monetary policy mechanism. Fama and French (1996) demonstrate that their three-factor model with the market excess return (RMRF) and two mimicking portfolios based on market capitalization (SMB) and book-to-market (HML) can explain the average return variations across portfolios formed on many different characteristics. They interpret their two mimicking portfolios as risk factors capturing risk premia for the relative distress of firms in the context of the ICAPM. However, there are patterns in average stock returns that are considered new anomalies because they are not explained by the Fama– French three-factor model. Fama and French (2008) find that the anomalous returns associated with net stock issues, accruals, and momentum are pervasive in all size groups in cross-section regressions. Furthermore, Campbell, Hilscher, and Szilagyi (2008) report that more distressed firms have lower average returns despite their high loadings on HML than less distressed firms. They conclude that their results indicate a significant challenge to the Fama–French model. Finally, the post-earnings-announcement drift anomaly or earnings momentum exists, first documented by Ball and Brown (1968), which describes the outperformance of good-news firms with high standardized-unexpected earnings (SUE) relative to bad-news (low-SUE) firms. Recently, several papers propose commonalities in these asset pricing anomalies. For example, Avramov, Chordia, Jostova, and Philipov (2012) find that strategies based on price momentum, earnings momentum , credit risk, and other anomalies derive their profitability from taking short positions in high credit risk firms during the deteriorating credit conditions. While Avramov et al. (2012) do not find risk-based explanations for the commonalities, other researchers find connections between these anomalies and aggregate risk factors. For example, Mahajan, Petkevich, and Petkova (2012) claim that momentum is a compensation for the systemic default risk because momentum profits are concentrated in periods of high default shocks. Liu and Zhang …