Stock market anomalies in the modern era

The number of stock market anomalies has skyrocketed to more than a hundred in recent years and is popularly known as the factor zoo. At the same time, studies show that many of these anomalies have largely disappeared in the modern era of trading technology, consistent with an increase in market efficiency. Complicating the analysis is that research also shows that many of these anomalies hold conditionally, a function of time-varying regimes due to behavioral factors or aggregate risk. Our paper addresses these three concerns by investigating if theme portfolios (algorithmic clusters of market anomaly portfolios) still generate alpha in the modern era of trading conditional on sentiment and market volatility regimes. We identify and provide an explanation for the types of anomalies that exist in the modern era. The fall in transactions costs has lead to increases in market efficiency and the disappearance of most anomaly themes in the factor zoo. However, increases in modern trading technology and near zero-commission trading have spurred an interesting side effect, by facilitating the entry of retail traders. We show themes that appeal to lottery demand traders have survived. Thus, momentum, low-risk, and quality, conditional on sources of aggregate risk or mispricing, are still relevant in the modern era.