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Does Academic Research Destroy Stock Return Predictability?

R. David McLean

Georgetown University - Department of Finance; affiliation not provided to SSRN

Jeffrey Pontiff

Boston College - Department of Finance

January 7, 2015

Journal of Finance, Forthcoming

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

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, C1

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Date posted: October 4, 2012 ; Last revised: February 24, 2016

Suggested Citation

McLean, R. David and Pontiff, Jeffrey, Does Academic Research Destroy Stock Return Predictability? (January 7, 2015). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2156623 or http://dx.doi.org/10.2139/ssrn.2156623

Contact Information

R. David McLean (Contact Author)
Georgetown University - Department of Finance ( email )
3700 O Street, NW
Washington, DC Washington DC 20057
United States

affiliation not provided to SSRN
Jeffrey Pontiff
Boston College - Department of Finance ( email )
Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
Feedback to SSRN

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References:  59
Citations:  11

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