Pseudo-Predictability in Conditional Asset Pricing Tests: Explaining Anomaly Performance with Politics, the Weather, Global Warming, Sunspots, and the Stars

Robert Novy-Marx

NBER Working Paper No. 18063
Issued in May 2012
NBER Program(s):   AP   CF

Ferson, Sarkissian and Simin (2003) warn that persistence in expected returns generates spurious regression bias in predictive regressions of stock returns, even though stock returns are themselves only weakly autocorrelated. Despite this fact a growing literature attempts to explain the performance of stock market anomalies with highly persistent investor sentiment. The data suggest, however, that the potential misspecification bias may be large. Predictive regressions of real returns on simulated regressors are too likely to reject the null of independence, and it is far too easy to find real variables that have "significant power" predicting returns. Standard OLS predictive regressions find that the party of the U.S. President, cold weather in Manhattan, global warming, the El Niño phenomenon, atmospheric pressure in the Arctic, the conjunctions of the planets, and sunspots, all have "significant power" predicting the performance of anomalies. These issues appear particularly acute for anomalies prominent in the sentiment literature, including those formed on the basis of size, distress, asset growth, investment, profitability, and idiosyncratic volatility.

download in pdf format
   (241 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w18063

Published: Novy-Marx, Robert, “Predicting anomaly performance with politics, the weather, global warming, sunspots, and the stars,” Journal of Financial Economics, Volume 112, Issue 2, May 2014, Pages 137–146

Users who downloaded this paper also downloaded* these:
Stambaugh, Yu, and Yuan w18231 The Long of It: Odds that Investor Sentiment Spuriously Predicts Anomaly Returns
Giovannini and Weil w2824 Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model
Novy-Marx w15940 The Other Side of Value: Good Growth and the Gross Profitability Premium
Frazzini and Pedersen w18558 Embedded Leverage
Bansal, Kiku, Shaliastovich, and Yaron w18104 Volatility, the Macroeconomy and Asset Prices
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us