Anomaly Predictability with the Mean-Variance Portfolio

Fisher College of Business Working Paper No. 2023-03-020

Charles A. Dice Working Paper No. 2023-20

80 Pages Posted: 21 Jul 2023 Last revised: 12 Dec 2023

See all articles by Carlo A. Favero

Carlo A. Favero

Bocconi University - Department of Economics; Bocconi University - Department of Finance; Centre for Economic Policy Research (CEPR)

Alessandro Melone

Ohio State University (OSU) - Fisher College of Business

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: December 11, 2023

Abstract

According to a no-arbitrage condition, risk-adjusted returns should be unpredictable. Using several prominent factor models and a large cross-section of anomalies, we find that past cumulative risk-adjusted returns predict future anomaly returns. Cumulative returns can be interpreted as deviations of an anomaly price from the price of the mean-variance efficient portfolio. Price deviations constitute a novel anomaly-specific predictor, endogenous to the given heuristic mean-variance portfolio, thus providing direct evidence for conditional misspecification. A zero-cost investment strategy using price deviations generates positive alphas. Our findings suggest that incorporating price information into cross-sectional models improves their ability to capture time-series return dynamics.

Keywords: Factor Models, Return Predictability, Mispricing, Conditional Misspecification, SDF

JEL Classification: C38, G12, G17

Suggested Citation

Favero, Carlo A. and Melone, Alessandro and Tamoni, Andrea, Anomaly Predictability with the Mean-Variance Portfolio (December 11, 2023). Fisher College of Business Working Paper No. 2023-03-020, Charles A. Dice Working Paper No. 2023-20, Available at SSRN: https://ssrn.com/abstract=4516438 or http://dx.doi.org/10.2139/ssrn.4516438

Carlo A. Favero

Bocconi University - Department of Economics ( email )

Via Gobbi 5
Milan, 20136
Italy

Bocconi University - Department of Finance ( email )

Via Roentgen 1
Milano, MI 20136
Italy

HOME PAGE: http://www.igier.unibocconi.it\favero

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Alessandro Melone (Contact Author)

Ohio State University (OSU) - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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