Zeroing in on the Expected Returns of Anomalies

72 Pages Posted: 12 Jun 2020

See all articles by Andrew Y. Chen

Andrew Y. Chen

Federal Reserve Board

Mihail Velikov

Pennsylvania State University

Multiple version iconThere are 2 versions of this paper

Date Written: May, 2020

Abstract

We zero in on the expected returns of long-short portfolios based on 120 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 8 bps per month. The strongest anomalies return only 10-20 bps after accounting for data-mining with either out-of-sample tests or empirical Bayesian methods. Expected returns are negligible despite cost optimizations that produce impressive net returns in-sample and the omission of additional trading costs like price impact.

JEL Classification: G10, G11, G12, G14

Suggested Citation

Chen, Andrew Y. and Velikov, Mihail, Zeroing in on the Expected Returns of Anomalies (May, 2020). FEDS Working Paper No. 2020-039, Available at SSRN: https://ssrn.com/abstract=3624932 or http://dx.doi.org/10.17016/FEDS.2020.039

Andrew Y. Chen (Contact Author)

Federal Reserve Board ( email )

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Washington, DC 20551
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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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