The History of the Cross Section of Stock Returns

73 Pages Posted: 12 Jan 2017

See all articles by Juhani T. Linnainmaa

Juhani T. Linnainmaa

USC Marshall School of Business; National Bureau of Economic Research (NBER)

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 24, 2016

Abstract

Using data spanning the 20th century, we show that most accounting-based return anomalies are spurious. When examined out-of-sample by moving either backward or forward in time, anomalies' average returns decrease, and volatilities and correlations with other anomalies increase. The data-snooping problem is so severe that even the true asset pricing model is expected to be rejected when tested using in-sample data. Our results suggest that asset pricing models should be tested using out-of-sample data or, when not feasible, by whether a model is able to explain half of the in-sample alpha.

Keywords: Factors; anomalies; asset pricing; data-mining

JEL Classification: G14

Suggested Citation

Linnainmaa, Juhani T. and Roberts, Michael R., The History of the Cross Section of Stock Returns (November 24, 2016). Marshall School of Business Working Paper No. 17-17. Available at SSRN: https://ssrn.com/abstract=2897719 or http://dx.doi.org/10.2139/ssrn.2897719

Juhani T. Linnainmaa (Contact Author)

USC Marshall School of Business ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

3620 Locust Walk, #2320
Philadelphia, PA 19104-6365
United States
(215) 573-9780 (Phone)

HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

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