An Economic Specification Test of Asset Pricing Models with A Large Number of Assets

We find a pricing error profitability pattern for well-known asset pricing models: the CAPM, Fama-French, Hou-Xue-Zhang, Stambaugh-Yuan, and Daniel-Hirshleifer-Sun. A trading strategy that buys low pricing error stocks and sells high pricing error ones earns significant average and risk-adjusted returns, and it performs similarly across all the models. This fact applies to a large set of models with factors extracted from 105 anomalies. The profitability is unexplained by investor sentiment, limits-to-arbitrage, prospect theory, and expectation extrapolation, suggesting that new factors are needed to better understand the cross section of stock returns