Selection Bias and Pseudo Discoveries on the Constancy of Stock Return Anomalies

Review of Quantitative Finance and Accounting 55(4) (2020), Pages 1407-1426

Posted: 14 Apr 2020 Last revised: 19 Oct 2020

See all articles by Russell P. Robins

Russell P. Robins

Tulane University - A.B. Freeman School of Business

Geoffrey Peter Smith

Arizona State University (ASU) - W.P. Carey School of Business

Date Written: March 19, 2020

Abstract

There are now a large and rapidly growing number of studies that test the constancy of stock return anomalies. In this study, we produce new and convincing evidence that the standard constancy test is heavily influenced by selection bias. Backed by a carefully designed Monte Carlo simulation, we show that selection bias predisposes the standard constancy test to reject the null by a factor of five to 12 times more than normally expected. Failure to recognize this bias can result in publication of the type of pseudo discoveries that Harvey (2017) warns about in his Presidential Address to the American Finance Association. We then describe the Quandt/Andrews test, a correct and unbiased test for anomalies and changes in anomalies, and apply it to test the constancy of 15 well-known stock return anomalies.

Keywords: Selection Bias, Stock Return Anomaly, Constancy Test

JEL Classification: G10, G14, G19

Suggested Citation

Robins, Russell P. and Smith, Geoffrey Peter, Selection Bias and Pseudo Discoveries on the Constancy of Stock Return Anomalies (March 19, 2020). Review of Quantitative Finance and Accounting 55(4) (2020), Pages 1407-1426, Available at SSRN: https://ssrn.com/abstract=3557218

Russell P. Robins

Tulane University - A.B. Freeman School of Business

7 McAlister Drive
New Orleans, LA 70118
United States

Geoffrey Peter Smith (Contact Author)

Arizona State University (ASU) - W.P. Carey School of Business ( email )

PO Box 873906
Tempe, AZ 85287-3706
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
260
PlumX Metrics