Does Academic Research Destroy Stock Return Predictability?
R. David McLean
University of Alberta - Department of Finance and Statistical Analysis
Boston College - Department of Finance
May 16, 2013
AFFI/EUROFIDAI, Paris December 2012 Finance Meetings Paper
We study the out-of-sample and post-publication return-predictability of 82 characteristics that are identified in published academic studies. The average out-of-sample decay due to statistical bias is about 10%, but not statistically different from zero. The average post-publication decay, which we attribute to both statistical bias and price pressure from aware investors, is about 35%, and statistically different from both 0% and 100%. Our findings point to mispricing as the source of predictability. Post-publication, stocks in characteristic portfolios experience higher volume, variance, and short interest, and higher correlations with portfolios that are based on published characteristics. Consistent with costly (limited) arbitrage, post-publication return declines are greater for characteristic portfolios that consist of stocks with low idiosyncratic risk.
Number of Pages in PDF File: 48
Keywords: anomalies, arbitrage, limits of arbitrage, short selling, predicting stock returns
JEL Classification: G11, G12, G00, G14, L3, C1working papers series
Date posted: October 4, 2012 ; Last revised: May 16, 2013
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