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
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
Date posted: October 4, 2012 ; Last revised: March 5, 2015
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