Review of Financial Studies, forthcoming
Charles A. Dice Center Working Paper No. 2017-10
134 Pages Posted: 31 Oct 2018
Date Written: October 2018
Most anomalies fail to hold up to currently acceptable standards for empirical finance. With microcaps mitigated via NYSE breakpoints and value-weighted returns, 65% of the 452 anomalies in our data library, including 96% of the trading frictions category, cannot clear the single test hurdle of the absolute t-value of 1.96. Imposing the higher, multiple test hurdle of 2.78 at the 5% significance level raises the failure rate to 82.1%. Even for the replicated anomalies, their economic magnitudes are much smaller than originally reported. In all, capital markets are more efficient than previously recognized.
Keywords: Replication, factor investing, anomalies, microcaps, multiple testing
JEL Classification: G12, G14
Suggested Citation: Suggested Citation