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ICAPM and the Accruals Anomaly

Last Updated on 10 February, 2024 by Rejaul Karim

Hui Guo and Paulo F. Maio’s forthcoming research paper, “ICAPM and the Accruals Anomaly,” introduces innovative multifactor models aimed at unraveling the enigmatic accruals anomaly. At the heart of their exploration lies the application of Merton’s Intertemporal Capital Asset Pricing Model (ICAPM), with a focus on the term and small-value spreads as key factors.

The models showcase remarkable explanatory power for cross-sectional risk premia associated with distinct accruals portfolio groups, offering valuable insights into the relationship between accruals risk premia and the business cycle.

Notably, their scaled version of the model demonstrates enhanced performance, underlining the dynamic nature of accruals risk premia.

As the paper unveils a nuanced comparison with established multifactor models, it promises to yield profound implications for asset pricing and offers a compelling engagement with the accruals anomaly.

Abstract Of Paper

We propose new multifactor models to explain the accruals anomaly. Our baseline model represents an application of Merton’s ICAPM, in which the key factors represent (innovations on) the term and small-value spreads. The model shows large explanatory power for cross-sectional risk premia associated with three accruals portfolio groups. A scaled version of the model shows better performance, suggesting that accruals risk premia are related with the business cycle. Both models compare favorably with popular multifactor models used in the literature, and also perform well in pricing other important anomalies. The risk price estimates of the hedging factors are consistent with the ICAPM framework.

Original paper – Download PDF

Here you can download the PDF and original paper of ICAPM and the Accruals Anomaly.

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Author

Hui Guo
University of Cincinnati – Department of Finance – Real Estate

Paulo F. Maio
Hanken School of Economics – Department of Finance and Statistics

Conclusion

In conclusion, Hui Guo and Paulo F. Maio’s pioneering research in “ICAPM and the Accruals Anomaly” has unveiled insightful multifactor models that offer a comprehensive explanation for this intriguing phenomenon.

The application of Merton’s ICAPM, with an emphasis on the term and small-value spreads as pivotal factors, has proven to yield substantial explanatory power for cross-sectional risk premia associated with distinct accruals portfolio groups.

Furthermore, the scaled version of the model’s enhanced performance has underscored the dynamic relationship between accruals risk premia and the business cycle.

Notably, the commendable performance of both models in comparison with established multifactor models speaks to their robustness and promises profound implications for asset pricing, offering a comprehensive and illuminating denouement to this in-depth investigation of the accruals anomaly.

Related Reading:

In Short Supply: Short Sellers and Stock Returns

There are Two Very Different Accruals Anomalies

FAQ

What is the main focus of the research paper “ICAPM and the Accruals Anomaly” by Hui Guo and Paulo F. Maio?

The main focus of the research paper is to introduce innovative multifactor models to explain the accruals anomaly. The authors apply Merton’s Intertemporal Capital Asset Pricing Model (ICAPM) with a specific focus on the term and small-value spreads as key factors in their models.

What factors are emphasized in the ICAPM-based model to explain the accruals anomaly?

The key factors emphasized in the ICAPM-based model are innovations on the term and small-value spreads. These factors are considered crucial in explaining the accruals anomaly in the context of the multifactor models proposed by the authors.

What does the paper reveal about the explanatory power of the models for cross-sectional risk premia associated with accruals portfolio groups?

The paper demonstrates that the proposed models, particularly the baseline ICAPM-based model and its scaled version, exhibit large explanatory power for cross-sectional risk premia associated with three accruals portfolio groups. This suggests that the models effectively capture the risk premia variation related to accruals within different portfolio groups.

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