Are Stock-Market Anomalies Anomalous After All?
89 Pages Posted: 19 Feb 2021 Last revised: 21 Feb 2021
Date Written: February 18, 2021
We propose a stochastic spanning to evaluate whether anomalies are genuine under factor-model framework. Our approach is nonparametric and does not rely on any assumption of return distribution and investor risk preferences. It depends on the whole distribution of returns, rather than only on the first two moments. Of the anomalies we consider, only a few expand the opportunity set of the risk-averter and have real economic content. Our approach is consistent in identifying genuine anomalies in and out of samples. This is in contrast to mean-variance (MV) spanning tests where anomalies identified in-sample, not out-of-sample.
Keywords: Stochastic dominance, stochastic spanning, mean-variance spanning market anomalies.
JEL Classification: G1, G10, G11, G12
Suggested Citation: Suggested Citation