Out-of-Sample Alphas Post-Publication

Fisher College of Business Working Paper No. 2025-03-002

Charles A. Dice Working Paper No. 2025-02

55 Pages Posted: 12 Feb 2025 Last revised: 25 Feb 2025

See all articles by Andrei S. Gonçalves

Andrei S. Gonçalves

Ohio State University (OSU) - Fisher College of Business

Johnathan Loudis

University of Notre Dame - Mendoza College of Business

Richard Ogden

Rowan University - Accounting & Finance

Date Written: February 12, 2025

Abstract

Anomaly strategies generate positive and significant CAPM alphas post-publication. Existing explanations include non-market risks, trading costs, and investment frictions. This paper introduces a complementary channel: when a new anomaly strategy is published, investors face uncertainty in identifying the optimal weight to allocate to the anomaly in order to achieve a positive alpha post-publication, making the strategy less appealing. Empirically, we find that the average post-publication alpha of anomaly strategies is close to zero when optimal weights are estimated out-of-sample using pre-publication data. This finding is robust across specifications, including those using empirical Bayesian shrinkage and machine learning to estimate weights. Conceptually, this suggests investors have little incentive to add a new anomaly strategy to their portfolios. While investors can generate positive out-of-sample alphas by combining multiple anomaly strategies via shrinkage methods, we show the demand from such investors is insufficient to eliminate alphas in equilibrium.

Keywords: Anomalies, CAPM Alphas, Out-of-Sample Alphas

JEL Classification: G10, G11, G12, G14

Suggested Citation

S. Gonçalves, Andrei and Loudis, Johnathan and Ogden, Richard, Out-of-Sample Alphas Post-Publication (February 12, 2025). Fisher College of Business Working Paper No. 2025-03-002, Charles A. Dice Working Paper No. 2025-02, Available at SSRN: https://ssrn.com/abstract=5135221 or http://dx.doi.org/10.2139/ssrn.5135221

Andrei S. Gonçalves (Contact Author)

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

2100 Neil Avenue
Columbus, OH 43210-1144
United States

Johnathan Loudis

University of Notre Dame - Mendoza College of Business ( email )

Notre Dame, IN 46556-5646
United States

Richard Ogden

Rowan University - Accounting & Finance ( email )

Glassboro, NJ 08028
United States

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