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Accounting for the Anomaly Zoo: A Trading Cost Perspective

28 Pages Posted: 21 Nov 2017  

Andrew Y. Chen

Federal Reserve Board

Mihail Velikov

Federal Reserve Bank of Richmond

Date Written: November 18, 2017

Abstract

This study shows that trading costs and post-publication decay can account for the entire zoo of stock return anomalies. We examine the returns net of trading costs for 135 published stock market anomalies under a wide variety of portfolio constructions, including many that use cost-mitigation techniques. The average anomaly earns a negative net return of -8 basis points per month in-sample. Anomalies with positive net returns in-sample deteriorate, leading to negative net returns post-publication. The best-performing combination of anomalies and portfolio construction nets a meager 25 basis points per month immediately after publication, but even these net returns fall to zero within 15 years, and are highly sensitive to the portfolio construction.

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 (November 18, 2017). 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://https://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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