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Does Academic Research Destroy Stock Return Predictability?

48 Pages Posted: 4 Oct 2012 Last revised: 24 Feb 2016

R. David McLean

Georgetown University - Department of Finance

Jeffrey Pontiff

Boston College - Department of Finance

Date Written: January 7, 2015

Abstract

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.

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

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

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: https://ssrn.com/abstract=2156623 or http://dx.doi.org/10.2139/ssrn.2156623

R. David McLean (Contact Author)

Georgetown University - Department of Finance ( email )

3700 O Street, NW
Washington, DC Washington DC 20057
United States

Jeffrey 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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