What are the Stambaugh-Yuan mispricing factors?

Question

AcadiFi · Accepted Answer

Stambaugh and Yuan (2017) constructed two composite factors from 11 well-known return anomalies, grouping them by the type of mispricing they reflect. MGMT (management/earnings-based) averages anomalies like net stock issues, composite equity issuance, accruals, net operating assets, asset growth, and investment-to-assets. PERF (performance/profitability-based) averages momentum, gross profitability, return on assets, and failure probability. The key insight: if each anomaly reflects common investor misvaluation, the composite should capture a shared mispricing signal more cleanly than any single anomaly. Portfolios sorted on the composite rank earn higher long-short spreads (about 1.0-1.2% per month) than any single anomaly (typically 0.5-0.7%). The Stambaugh-Yuan four-factor model uses MKTRF, SMB (reconstructed), MGMT, and PERF. In tests on hedge fund returns, this model produces substantially less alpha than Fama-French five-factor, suggesting hedge fund returns owe much to mispricing exposures. ```mermaid flowchart LR A[11
Anomalies] --> B[MGMT
Composite] A --> C[PERF
Composite] B --> D[Mispricing
Model] C --> D ``` Critics note that composite construction involves look-ahead choices and that the factors are highly correlated with profitability and investment from Fama-French five-factor, so they are not orthogonal contributions to asset pricing theory.

What are the Stambaugh-Yuan mispricing factors?

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