Academia Creating Anomalies?

Does widespread investor acceptance of the capital asset pricing model (CAPM) of stock returns drive undervaluation of stocks with low past alphas? In his February 2019 paper entitled “The Unintended Impact of Academic Research on Asset Returns: The CAPM Alpha”, Alex Horenstein examines whether such acceptance distorts the U.S. stock market. Specifically, he each year at the beginning of January reforms a betting against alpha (BAA) hedge portfolio that is long (short) stocks with alphas lower (higher) than the median based on monthly returns over the past five years. He then weights stocks according to their respective alpha ranks, rescales the long and short sides separately to have market beta 1.0 and holds for one year. He analyzes performance of this portfolio and eight widely accepted equity factors (size, value, momentum, profitability, investment, short-term reversal, long-term reversion and betting against beta) during three subperiods: (1) pre-CAPM era (1932-1964); (2) CAPM era (1965-1992); and, (3) smart beta era (1993-2015). Using total returns for a broad sample of U.S. common stocks and returns for eight accepted equity factors during January 1927 through December 2015, he finds that:

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