Firm characteristics, alternative factors, and asset-pricing anomalies: evidence from Japan

Abstract

Based on the errors-in-variables-free approach proposed by Brennan et al. [J. Financial Econ., 1998, 49, 345–373], we investigate the competing explanatory capabilities of alternative multi-factor models when examining various asset-pricing anomalies using Japanese data for the period 1978–2006. We find that turnover and book-to-market (BM) ratio are the two major characteristics that significantly explain the average stock returns. A further sub-period analysis reveals that the turnover effect is significant only before 1990, but cannot be explained by any multifactor models. In contrast, the BM premium is significant only after 1990, and can be explained by the Fama–French three-factor model. Thus, the results suggest that asset-pricing anomalies documented in the literature are not universal, and may be different across different markets.

Keywords:

• Factors
• Characteristics
• Asset-pricing anomalies
• Fama-MacBeth cross-sectional regression
• Least-trimmed squares

Acknowledgements

Comments and suggestions from Hung-Neng Lai, Wei-Cheng Miao, and Min-Teh Yu are gratefully acknowledged.

Notes

†Miyao (2002), for example, attributes the bubble to monetary policy shocks, and Kato (1995) suggests that the bubble crashed as investors’ expectations collapsed.

‡Details for the formation of factor portfolios are presented in the appendix.

†This is because most firms listed on the TSE use March as the end of their fiscal year.

† Zhang (2005) proposes the costly reversibility and countercyclical price of risk hypotheses, and argues that assets in place are harder to reduce in bad times. As a result, value (high BM) firms are riskier than growth (low BM) firms because of the higher price of risk.

† The results of unconditional tests are available upon request.

†There is a potential selectivity bias in that later models would necessarily outperform the earlier ones, because otherwise they would not have been published.

‡ It may be of interest to further investigate the firm characteristics of these extreme firms in Japan, for example, using the quantile regression. We leave this issue for future research.