Explaining Anomalies in Australia with a Five Factor Asset Pricing Model
This paper compares the ability of threeaEUR factor and fiveaEUR factor asset pricing models to explain the apparent profitability of a broad selection of anomalies in Australian equity returns. Rather than examining the fit of each model to common test portfolios, our focus is on the spread return to longaEUR"short trading strategies designed around soaEUR called anomalies. After documenting significant spread returns to 16 anomalies (including several not previously studied in Australia) the empirical analysis provides cautious support that the recentlyaEUR proposed investment and profitability factors have a role to play. The number of anomalies that remains after risk adjustment decreases under the fiveaEUR factor model. Further, while the magnitude of reduction in alpha is modest, our testing shows that it is statistically significant in many cases. However, both threeaEUR factor and fiveaEUR factor models repeatedly fail the Gibbons, Ross, and Shanken's (1989) (GRS) test, suggesting that the quest for a better asset pricing model is not yet complete.