Zeroing in on the Expected Returns of Anomalies

72 Pages Posted: 21 Nov 2017 Last revised: 28 Sep 2021

See all articles by Andrew Y. Chen

Andrew Y. Chen

Board of Governors of the Federal Reserve System

Mihail Velikov

Pennsylvania State University

Multiple version iconThere are 2 versions of this paper

Date Written: September 27, 2021

Abstract

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

Chen, Andrew Y. and Velikov, Mihail, Zeroing in on the Expected Returns of Anomalies (September 27, 2021). Available at SSRN: https://ssrn.com/abstract=3073681 or http://dx.doi.org/10.2139/ssrn.3073681

Andrew Y. Chen (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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Washington, DC 20551
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202-973-6941 (Phone)

HOME PAGE: http://sites.google.com/site/chenandrewy/

Mihail Velikov

Pennsylvania State University ( email )

University Park
State College, PA 16802
United States

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