Comparing Anomalies Using Liquidity and Earnings

Vol. 18, No. 3, 2020

Robert Snigaroff, David Wroblewski, and Sean Sehyun Yoo

We compare three factor models and their ability to explain a set of portfolio anomalies. Two of these models are based on market capitalization which most of the industry currently uses to characterize stocks. We replace this line of thinking by utilizing both earnings and liquidity to construct a competing model, which is intuitive to practitioners. Partitioning and characterizing stock returns in this way enables us to dispel some of the most challenging asset pricing anomalies. Historically, investors have concerned themselves with our proposed stock descriptors for far longer than they have with value and size characteristics.