There is some confusion surrounding premia commanded by standard stock market factors. Some research attributes the factors to risk and some other research considers them to be a manifestation of mispricing. This note tries to resolve this confusion. My position is that the premia for factors that are priced should remain stable over time, as there is no reason for investors to stop pricing risk. Conversely, unstable premia that trend downward over time suggest mispricing being arbitraged away. The paper considers premia for five well-known factors based on accounting and market capitalization data, and two factors based on past returns, together with the excess market return. Amongst these eight standard and popular factors, only the profitability and market factors yield a reliable non-zero premium over the last 25 years. Factors based on value, size, real investment, short- and long-term reversal, and momentum, all fail to command significant non-zero premia. The evidence therefore suggests that the original in-sample premia for these factors were driven by mispricing, rather than genuine risk pricing. As time goes on, we would expect much the same to happen to the profitability anomaly. The evidence is supports adaptive market efficiency, that is, inefficiencies disappear once discovered.
| Published in | International Journal of Finance and Banking Research (Volume 11, Issue 6) |
| DOI | 10.11648/j.ijfbr.20251106.13 |
| Page(s) | 143-146 |
| Creative Commons |
This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited. |
| Copyright |
Copyright © The Author(s), 2025. Published by Science Publishing Group |
Factors, Risk Premia, Stock Returns
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APA Style
Subrahmanyam, A. (2025). Keeping It Simple: The Disappearance of Premia for Standard Non-Market Factors. International Journal of Finance and Banking Research, 11(6), 143-146. https://doi.org/10.11648/j.ijfbr.20251106.13
ACS Style
Subrahmanyam, A. Keeping It Simple: The Disappearance of Premia for Standard Non-Market Factors. Int. J. Finance Bank. Res. 2025, 11(6), 143-146. doi: 10.11648/j.ijfbr.20251106.13
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Download@article{10.11648/j.ijfbr.20251106.13,
author = {Avanidhar Subrahmanyam},
title = {Keeping It Simple: The Disappearance of Premia for Standard Non-Market Factors},
journal = {International Journal of Finance and Banking Research},
volume = {11},
number = {6},
pages = {143-146},
doi = {10.11648/j.ijfbr.20251106.13},
url = {https://doi.org/10.11648/j.ijfbr.20251106.13},
eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijfbr.20251106.13},
abstract = {There is some confusion surrounding premia commanded by standard stock market factors. Some research attributes the factors to risk and some other research considers them to be a manifestation of mispricing. This note tries to resolve this confusion. My position is that the premia for factors that are priced should remain stable over time, as there is no reason for investors to stop pricing risk. Conversely, unstable premia that trend downward over time suggest mispricing being arbitraged away. The paper considers premia for five well-known factors based on accounting and market capitalization data, and two factors based on past returns, together with the excess market return. Amongst these eight standard and popular factors, only the profitability and market factors yield a reliable non-zero premium over the last 25 years. Factors based on value, size, real investment, short- and long-term reversal, and momentum, all fail to command significant non-zero premia. The evidence therefore suggests that the original in-sample premia for these factors were driven by mispricing, rather than genuine risk pricing. As time goes on, we would expect much the same to happen to the profitability anomaly. The evidence is supports adaptive market efficiency, that is, inefficiencies disappear once discovered.},
year = {2025}
}
TY - JOUR T1 - Keeping It Simple: The Disappearance of Premia for Standard Non-Market Factors AU - Avanidhar Subrahmanyam Y1 - 2025/12/19 PY - 2025 N1 - https://doi.org/10.11648/j.ijfbr.20251106.13 DO - 10.11648/j.ijfbr.20251106.13 T2 - International Journal of Finance and Banking Research JF - International Journal of Finance and Banking Research JO - International Journal of Finance and Banking Research SP - 143 EP - 146 PB - Science Publishing Group SN - 2472-2278 UR - https://doi.org/10.11648/j.ijfbr.20251106.13 AB - There is some confusion surrounding premia commanded by standard stock market factors. Some research attributes the factors to risk and some other research considers them to be a manifestation of mispricing. This note tries to resolve this confusion. My position is that the premia for factors that are priced should remain stable over time, as there is no reason for investors to stop pricing risk. Conversely, unstable premia that trend downward over time suggest mispricing being arbitraged away. The paper considers premia for five well-known factors based on accounting and market capitalization data, and two factors based on past returns, together with the excess market return. Amongst these eight standard and popular factors, only the profitability and market factors yield a reliable non-zero premium over the last 25 years. Factors based on value, size, real investment, short- and long-term reversal, and momentum, all fail to command significant non-zero premia. The evidence therefore suggests that the original in-sample premia for these factors were driven by mispricing, rather than genuine risk pricing. As time goes on, we would expect much the same to happen to the profitability anomaly. The evidence is supports adaptive market efficiency, that is, inefficiencies disappear once discovered. VL - 11 IS - 6 ER -
Anderson Graduate School of Management, University of California at Los Angeles, Los Angeles, the United States
