Real-Time Profitability of Published Anomalies: An Out-of-Sample Test
45 Pages Posted: 22 Mar 2009 Last revised: 16 Oct 2013
Date Written: February 15, 2009
Previous studies show mixed results about the out-of-sample performance of various asset-pricing anomalies. To reduce data-snooping bias, this paper simulates a real-time trader who chooses among all asset-pricing anomalies published prior to that time using only non-forward-looking filters. I find that a trader can outperform the market by recursively picking the best past performer among published anomalies even after transaction costs are taken into account. The excess return tends to be highest when the trader looks at past performances between two years and five years and when the trader considers more anomalies. For published anomalies, their excess returns over benchmark as well as relative ranks among contemporaneous anomalies do not decrease over time, indicating a relatively stable performance once being published. Relying only on the then-available anomaly literature and historical data, the overall result shows a possible way to beat the market in real time.
Keywords: Data-snooping Bias, Asset-pricing Anomalies, Out-of-sample Test, Real-time Simulation
JEL Classification: G11, G14, D83
Suggested Citation: Suggested Citation