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A four-factor model with two "mispricing" factors, in addition to market and size factors, accommodates a large set of anomalies better than notable four-and five-factor alternative models. Moreover, our size factor reveals a small-firm premium nearly twice usual estimates. The mispricing factors aggregate information across 11 prominent anomalies by averaging rankings within two clusters exhibiting the greatest return co-movement. Investor sentiment predicts the mispricing factors, especially their short legs, consistent with a mispricing interpretation and the asymmetry in ease of buying versus shorting. A three-factor model with a single mispricing factor also performs well, especially in Bayesian model comparisons. (JEL G12)
Stambaugh et al. (Sat,) studied this question.
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