May 2020

Zeroing in on the Expected Returns of Anomalies

Andrew Y. Chen and Mihail Velikov

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.

DOI: https://doi.org/10.17016/FEDS.2020.039

PDF: Full Paper

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Last Update: May 22, 2020