MULTIFACTOR EXPLANATIONS OF ASSET PRICING ANOMALIES

Previous work shows that average returns on common stocks are related to firm characteristics like size, earnings/price, cash flow/price, bo ok-to-market equity, past sales growth, long-term past return, and sho rt-term past return. Because these patterns in average returns apparen tly are. not explained by the CAPM, they are called anomalies. We find that, except for the continuation of short-term returns, the anomalie s largely disappear in a three-factor model. Our results are consisten t with rational ICAPM or APT asset pricing, but we also consider irrat ional pricing and data problems as possible explanations.