Zeroing in on the Expected Returns of Anomalies
Abstract: We zero in on the expected returns of long-short portfolios based on 120 stock market anomalies by accounting for (1) effective bid-ask spreads, (2) post-publication effects, and (3) the modern era of trading technology that began in the early 2000s. Net of these effects, the average anomaly's expected return is a measly 8 bps per month. The strongest anomalies return only 10-20 bps after accounting for data-mining with either out-of-sample tests or empirical Bayesian methods. Expected returns are negligible despite cost optimizations that produce impressive net returns in-sample and the omission of additional trading costs like price impact.
File(s): File format is application/pdf https://www.federalreserve.gov/econres/feds/files/2020039pap.pdf
Part of Series: Finance and Economics Discussion Series
Publication Date: 2020-05-22