Zeroing in on the Expected Returns of Anomalies

Andrew Chen and Mihail Velikov ()
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Mihail Velikov: https://directory.smeal.psu.edu/mjv5465

No 2020-039, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

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.

Keywords: trading costs; Mispricing; Stock return anomalies; Anomaly zoo (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 G14 (search for similar items in EconPapers)
Pages: 72 p.
Date: 2020-05-22
New Economics Papers: this item is included in nep-fmk and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2020-39

DOI: 10.17016/FEDS.2020.039

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