Anomalies and the Expected Market Return

Xi Dong, Yan Li, David E. Rapach and Guofu Zhou

Journal of Finance, 2022, vol. 77, issue 1, 639-681

Abstract: We provide the first systematic evidence on the link between long‐short anomaly portfolio returns—a cornerstone of the cross‐sectional literature—and the time‐series predictability of the aggregate market excess return. Using 100 representative anomalies from the literature, we employ a variety of shrinkage techniques (including machine learning, forecast combination, and dimension reduction) to efficiently extract predictive signals in a high‐dimensional setting. We find that long‐short anomaly portfolio returns evince statistically and economically significant out‐of‐sample predictive ability for the market excess return. The predictive ability of anomaly portfolio returns appears to stem from asymmetric limits of arbitrage and overpricing correction persistence.

Date: 2022
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https://doi.org/10.1111/jofi.13099

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Persistent link: https://EconPapers.repec.org/RePEc:bla:jfinan:v:77:y:2022:i:1:p:639-681

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