Zeroing in on the Expected Returns of Anomalies
72 Pages Posted: 21 Nov 2017 Last revised: 28 Sep 2021
Date Written: September 27, 2021
We zero in on the expected returns of long-short portfolios based on 204 stock market anomalies by accounting for (1) effective bid-ask spreads, (2) post-publication effects, and (3) the modern era of trading technology that began in the early 2000s. Net of these effects, the average anomaly's expected return is a measly 4 bps per month. The strongest anomalies net at best 10 bps after controlling for data-mining. Several methods for combining anomalies net around 20 bps. Expected returns are negligible despite cost mitigations that produce impressive net returns in-sample and the omission of additional trading costs like price impact.
Keywords: Stock Return Anomalies, Mispricing, Trading Costs
JEL Classification: G10, G11, G12, G14
Suggested Citation: Suggested Citation