International Tests Of Factor Anomalies: Most Don’t Survive

Since the development of the capital asset pricing model (CAPM) about 50 years ago, academic researchers have documented hundreds of “anomalies” that generate significant positive alpha. There are now so many that economist John Cochrane, in his 2011 presidential address to the American Finance Association, referred to them as the “factor zoo,” which I hit on in my post “Is there a Replication Crisis in Finance?” There are certainly incentives to find anomalies, both for academia and investment firms, raising concerns that many of them may be nothing more than the result of data mining exercises, or they rely too heavily on tiny stocks to be exploitable. Concerns can be mitigated by out-of-sample tests in non-U.S. markets as well as having intuitively strong risk- or behavioral-based explanations (along with limits to arbitrage) for the existence of an anomaly.

Fabian Hollstein contributes to the anomaly literature with his September 2020 study “The World of Anomalies: Smaller Than We Think?” Hollstein examined 132 return anomalies in international equity markets. His data set included all (47) countries classified as developed and emerging markets by Morgan Stanley Capital International. For each region and anomaly variable, he sorted the stocks into equal-weighted decile portfolios, value-weighted decile portfolios, and value-weighted decile portfolios using breakpoints derived from large stocks (mitigating the effect of microcaps). The holding period for the anomalies was generally one month, repeating the sorting at the end of each month. The data spanned the period January 1990 to December 2017.

Following is a summary of his findings:

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Disclaimer: Performance figures contained herein are hypothetical, unaudited and prepared by Alpha Architect, LLC; hypothetical results are intended for illustrative purposes only. Past ...

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