Mispricing and the five-factor model

- The misvaluation factor UMO cannot be explained by the five-factor model.
- However, SMB, HML, RMW, and CMA are rendered insignificant in the presence of UMO.
- A misvaluation factor-augmented CAPM performs similar to the five-factor model.

The information about expected returns contained in the size, value, profitability, and investment factors of Fama and French's five-factor model is rendered insignificant in the presence of a systematic misvaluation factor. A parsimonious two-factor model consisting of the market factor and a systematic misvaluation factor provides in general a similar description of average returns as the five-factor model.