102 Pages Posted: 19 Jul 2017
Date Written: July 14, 2017
We investigate the correlation structure of anomaly strategy returns. From an initial 434 anomalies, we select 116 anomalies that are significant in the mean and not highly correlated with other anomalies. Cluster analysis reveals 24 clusters and 29 singleton anomalies that can be grouped into 3 essentially uncorrelated blocks. Correlations between anomaly strategies exhibit some stability over time at both a pairwise and aggregate level. The exception is a correlation spike in 2001, possibly related to the aftermath of the dot-com crisis. In volatile markets correlations increase in magnitude while maintaining their sign. Short and long legs of the same anomaly are highly correlated but becomes largely uncorrelated once we use market excess returns, suggesting that the long and short legs of anomalies follow different dynamics once market-wide influences are compensated for. Correlations based on the residuals of benchmark models are substantially lower, with mean absolute correlation declining by up to half. The existence of 116 anomaly strategies that are not highly correlated echoes other findings in the literature that the return generating process for realised returns appears to be of a high dimension.
Keywords: Return Predictability, Anomalies, Correlation, Benchmark Models, Clustering
JEL Classification: G12, G14, G17, C38
Suggested Citation: Suggested Citation
Geertsema, Paul and Lu, Helen, The Correlation Structure of Anomaly Strategies (July 14, 2017). Available at SSRN: https://ssrn.com/abstract=3002797