Assaying Anomalies
40 Pages Posted: 26 Jan 2023 Last revised: 13 Feb 2024
Date Written: February 13, 2024
Abstract
We propose a protocol for testing potential cross-sectional predictors of equity returns, and describe turn-key tools for democratizing the implementation of protocol with little more effort than pushing a button. Our free-to-use web application automatically generates an online appendix with text, tables, and figures, analyzing the performance of a candidate cross-sectional return predictor. The tests in our protocol go far beyond the direct inferences available from standard linear factor models, identifying issues that commonly arise testing equity strategies, paying particular attention to arbitrage limits that can make a strategy look good on paper even when if cannot be profitably traded in practice. It also identifies similar anomalies and places the proposed predictor in the context of the now extensive “factor zoo.”
Keywords: Anomalies, Performance Evaluation, Trading Costs, Factor Models
JEL Classification: G11, G12, G14
Suggested Citation: Suggested Citation