The History of the Cross Section of Stock Returns

74 Pages Posted: 5 Dec 2016 Last revised: 23 Jul 2023

See all articles by Juhani T. Linnainmaa

Juhani T. Linnainmaa

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER); Kepos Capital

Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER)

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Date Written: December 2016

Abstract

Using data spanning the 20th century, we show that most accounting-based return anomalies are spurious. When examined out-of-sample by moving either backward or forward in time, anomalies' average returns decrease, and volatilities and correlations with other anomalies increase. The data-snooping problem is so severe that even the true asset pricing model is expected to be rejected when tested using in-sample data. Our results suggest that asset pricing models should be tested using out-of-sample data or, when not feasible, by whether a model is able to explain half of the in-sample alpha.

Suggested Citation

Linnainmaa, Juhani T. and Roberts, Michael R., The History of the Cross Section of Stock Returns (December 2016). NBER Working Paper No. w22894, Available at SSRN: https://ssrn.com/abstract=2880332

Juhani T. Linnainmaa (Contact Author)

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

HOME PAGE: http://www.tuck.dartmouth.edu/faculty/faculty-directory/juhani-linnainmaa

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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Kepos Capital ( email )

620 Eighth Avenue
New York, NY 10018
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Michael R. Roberts

The Wharton School - University of Pennsylvania; National Bureau of Economic Research (NBER) ( email )

3620 Locust Walk, #2320
Philadelphia, PA 19104-6365
United States
(215) 573-9780 (Phone)

HOME PAGE: http://finance.wharton.upenn.edu/~mrrobert/

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