Zeroing in on the Expected Returns of Anomalies

59 Pages Posted: 21 Nov 2017 Last revised: 18 Mar 2020

See all articles by Andrew Y. Chen

Andrew Y. Chen

Federal Reserve Board

Mihail Velikov

Pennsylvania State University

Date Written: March 17, 2020


We zero in on the expected returns of long-short portfolios based on 120 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 8 bps per month. The strongest anomalies return only 10-20 bps after accounting for data-mining with either out-of-sample tests or empirical Bayesian methods. Expected returns are negligible despite cost optimizations 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

Chen, Andrew Y. and Velikov, Mihail, Zeroing in on the Expected Returns of Anomalies (March 17, 2020). Finance Down Under, 2019, Building on the Best from the Cellars of Finance. Available at SSRN: or

Andrew Y. Chen (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-973-6941 (Phone)


Mihail Velikov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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