Does Academic Research Destroy Stock Return Predictability?
R. David McLean
University of Alberta - Department of Finance and Statistical Analysis
Boston College - Department of Finance
January 7, 2015
AFFI/EUROFIDAI, Paris December 2012 Finance Meetings Paper
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, C1working papers series
Date posted: October 4, 2012 ; Last revised: February 17, 2015
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