What Drives Anomaly Returns?

We decompose the returns of …five well-known anomalies into cash fl‡ow and discount rate news. Common patterns emerge across all factor portfolios and their mean-variance efficient combination. The main source of anomaly return variation is news about cash ‡flows. Anomaly cash ‡ow and discount rate components are strongly negatively correlated, and this negative correlation is driven by news about long-run cash flows. Interestingly, anomaly cash ‡flow (discount rate) news is approximately uncorrelated with market cash ‡flow (discount rate) news. These rich empirical patterns are
useful for guiding specifi…cations of asset pricing models and evaluating myriad theories of anomalies.