The correlation structure of anomaly strategies

Paul Geertsema and Helen Lu

Journal of Banking & Finance, 2020, vol. 119, issue C

Abstract: We consolidate a large number of mean-significant anomalies into cluster portfolios. More than a third of cluster portfolios remain significant under the Hou et al. (2020) five-factor model — the best performing among six benchmark models tested. A best-first search yields nine factors that subsume all cluster portfolios as well as all significant anomalies, demonstrating the feasibility of a parsimonious description of average realised returns. The expected growth factor (EG) and a cluster portfolio linked to accruals are prominent factors that improve pricing performance. The search-generated model produces a monthly maximum squared Sharpe ratio of 0.51, considerably higher than current benchmark models.

Keywords: Anomalies; Correlation; Cluster analysis; Machine learning; Asset pricing (search for similar items in EconPapers)
JEL-codes: C38 G12 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:119:y:2020:i:c:s0378426620301965

DOI: 10.1016/j.jbankfin.2020.105934

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