Can Academic Research Generate New Anomalies?

Abstract

This paper explores a channel whereby new anomalies can appear as investors alter portfolios suggested by the dissemination of academic knowledge. In particular, I find that assets with a low realized CAPM alpha outperform those with a high one. In a multifactor world the CAPM is misspecified. I find evidence that its widespread application since the 1960s and the multifactor literature that followed generated incentives for fund managers (and possibly other money managers) to tilt portfolios systematically towards high CAPM alpha. To do this, they must tilt portfolios away from low CAPM alpha assets, causing such assets to be undervalued.

Keywords: capital asset pricing model, liquidity, benchmarking, mutual funds, overreaction, smart beta, anomalies

JEL Classification: G10, G12