Beat the Market with Hot-Anomaly Switching?
March 22, 2010 - Big Ideas
Can investors beat the market by iteratively finding and exploiting the current hot anomaly? In the September 2009 update of his paper entitled “Real-Time Profitability of Published Anomalies: An Out-of-Sample Test”, Zhijian Huang investigates whether a trader can realize excess returns by repeatedly picking the anomaly with the best return during a rolling historical window from an expanding universe of anomalies as published, with a specific objective of suppressing data snooping bias. The universe includes anomalies that: (1) have been published in at least one of five top-ranked finance journals; (2) relate to the calendar or to cross-sectional predictability; and, (3) can be re-evaluated annually. Using monthly return data associated with 11 anomalies published during 1972-2005 (Monday/weekend effect, January effect and cross-sectional effects related to size, book-to-market ratio, momentum, earnings-price ratio, cash flow-price ratio, dividend yield, debt-equity ratio, sales growth and trading volume/turnover) as available from 1926 through 2008, he concludes that: Keep Reading