NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The History of the Cross Section of Stock Returns

Juhani T. Linnainmaa, Michael R. Roberts

NBER Working Paper No. 22894
Issued in December 2016
NBER Program(s):Asset Pricing

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.

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Document Object Identifier (DOI): 10.3386/w22894

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