Abstract

http://ssrn.com/abstract=2156623
 
 

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Does Academic Research Destroy Stock Return Predictability?


R. David McLean


University of Alberta - Department of Finance and Statistical Analysis

Jeffrey Pontiff


Boston College - Department of Finance

January 7, 2015

AFFI/EUROFIDAI, Paris December 2012 Finance Meetings Paper

Abstract:     
We study the out-of-sample and post-publication return-predictability of 97 characteristics that academic studies show to predict cross-sectional stock returns. Characteristic portfolio returns are 26% lower out-of-sample and 58% lower post-publication. The out-of-sample decline is an upper bound estimate of the effects of statistical biases (e.g., data mining). We estimate a 32% (58% - 26%) lower return from publication-informed trading. Post-publication declines are greater for predictors with higher returns, and predictor portfolios exhibit post-publication increases in return correlations with other published-predictor portfolios. Returns are higher for portfolios concentrated in stocks with high idiosyncratic risk and low liquidity. Our findings suggest that investors learn about mispricing from academic publications.

Number of Pages in PDF File: 45

Keywords: anomalies, arbitrage, limits of arbitrage, short selling, predicting stock returns

JEL Classification: G11, G12, G00, G14, L3, C1

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Date posted: October 4, 2012 ; Last revised: February 17, 2015

Suggested Citation

McLean, R. David and Pontiff, Jeffrey, Does Academic Research Destroy Stock Return Predictability? (January 7, 2015). AFFI/EUROFIDAI, Paris December 2012 Finance Meetings Paper. Available at SSRN: http://ssrn.com/abstract=2156623 or http://dx.doi.org/10.2139/ssrn.2156623

Contact Information

R. David McLean (Contact Author)
University of Alberta - Department of Finance and Statistical Analysis ( email )
School of Business
Edmonton, Alberta T6G 2R6
Canada
780-492-8005 (Phone)
780-492-3325 (Fax)
HOME PAGE: http://business.ualberta.ca/rdmclean
Jeffrey E. Pontiff
Boston College - Department of Finance ( email )
Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
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