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Why Stock Anomalies Weaken After Publication

June 2, 2021 • Posted in Big Ideas

Is the known weakening of stock anomalies after publication due more to in-sample overfitting by researchers or post-publication exploitation by arbitrageurs (market adaptation)? In their May 2021 paper entitled “Why and How Systematic Strategies Decay”, Antoine Falck, Adam Rej and David Thesmar examine the typical post-publication risk-adjusted performance (Sharpe ratio) of U.S. stock anomalies. They include only anomalies published through 2010 to allow significant out-of-sample testing in their dataset that ends in 2014. In general, their anomaly return calculations: (1) are based on long-short portfolios of top minus bottom tenth (decile) of anomaly variable sorts; (2) assume that annual variables are available four months after fiscal year end; and, (3) are market beta-hedged based on 36-month rolling betas. They consider date of publication, six proxies for in-sample overfitting and four proxies for ease of anomaly exploitation (arbitrage) to explain weaker post-publication performance. Using a sample of 72 published investment strategies as applied to U.S. stocks during January 1963 through April 2014 and as applied to international stocks as available during January 1995 through December 2018, they find that:

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