Accounting for the Anomaly Zoo: A Trading Cost Perspective

53 Pages Posted: 21 Nov 2017 Last revised: 14 Jan 2019

See all articles by Andrew Y. Chen

Andrew Y. Chen

Federal Reserve Board

Mihail Velikov

Federal Reserve Bank of Richmond

Date Written: January 11, 2019

Abstract

We study the post-publication trading costs of 120 stock market anomalies. Trading costs use effective bid-ask spreads from high-frequency ISSM and TAQ data when available and average four low-frequency proxies otherwise. The average equal-weighted long-short portfolio nets -3 bps per month post-publication after costs. Optimized cost mitigation using value-weighting and buy/hold spreads dramatically improves net returns in-sample but nets only 4 to 12 bps post-publication on average. The strongest anomalies net just 10-20 bps once selection bias is accounted for. These results show that the average investor should expect tiny profits (alternatively, a tiny risk premium) from investing in anomalies.

Keywords: Stock Return Anomalies, Mispricing, Trading Costs

JEL Classification: G10, G11, G12, G14

Suggested Citation

Chen, Andrew Y. and Velikov, Mihail, Accounting for the Anomaly Zoo: A Trading Cost Perspective (January 11, 2019). Finance Down Under 2019 Building on the Best from the Cellars of Finance. Available at SSRN: https://ssrn.com/abstract=3073681 or http://dx.doi.org/10.2139/ssrn.3073681

Andrew Y. Chen (Contact Author)

Federal Reserve Board ( email )

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

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

Mihail Velikov

Federal Reserve Bank of Richmond ( email )

502 S. Sharp Street
Baltimore, MD 21201
United States

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