International Tests Of Factor Anomalies: Most Don’t Survive

The results are hypothetical results and are NOT an indicator of future results and do NOT represent returns that any investor actually attained. Indexes are unmanaged and do not reflect management or trading fees, and one cannot invest directly in an index.

His findings led Hollstein to conclude that:

“Most of the anomalies reflect random deviations from market efficiency.”

He added:

“Overall, my results indicate that an overwhelming majority of previously documented anomalies are illusory and cannot be profitably traded upon in international markets.”

Hollstein’s findings add to the body of research demonstrating that investors should be skeptical of findings of anomalies. To address the skepticism and minimize the risks of data mining, in our book, Your Complete Guide to Factor-Based Investing, Andrew Berkin and I provide the following criteria a factor should show evidence of before investing: a premium that is persistent across long periods of time and economic regimes; pervasive across the globe, industries and even asset classes; robust to various definitions; survives transactions costs; and has intuitive risk-based or behavioral-based explanations for why that premium should be expected to persist. The equity factors that met our criteria are beta, size, value, momentum, and profitability/quality. I do recommend that the size factor be screened for quality, avoiding lottery-like stocks.

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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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