Tests for Market Anomalies Using Conditional Asset Pricing Models

One of the attributes to incomplete description of asset prices is the static nature of the asset pricing models. This study presents conditional asset pricing models incorporating investor sentiment which is found to affect stock returns recently. This study further investigates whether incorporating conditioning information such as investor sentiment, macroeconomic variable, and firm characteristics can enhance the performance of the asset pricing models. Extending Avramov and Chordia(2006) s conditional asset pricing framework, this study found that adding investor sentiment, macro-economic variable, and firm characteristics can increase the explanatory power of the asset pricing models as well as often explain the market anomalies. Specifically, the significant size effect and value effect were often captured in the conditional framework. The momentum effect, however, remains still when investor sentiment, macro-economic variables, and firm characteristics were added as conditioning information.