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The History of the Cross Section of Stock Returns

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  • Juhani T. Linnainmaa
  • Michael R. Roberts

Abstract

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.

Suggested Citation

  • Juhani T. Linnainmaa & Michael R. Roberts, 2016. "The History of the Cross Section of Stock Returns," NBER Working Papers 22894, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:22894
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    References listed on IDEAS

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    Cited by:

    1. Hou, Kewei & Xue, Chen & Zhang, Lu, 2017. "Replicating Anomalies," Working Paper Series 2017-10, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    2. Andrew Detzel & Philipp Schaberl & Jack Strauss, 2018. "There are two very different accruals anomalies," European Financial Management, European Financial Management Association, vol. 24(4), pages 581-609, September.
    3. Kaserer Christoph & Hanauer Matthias X., 2017. "25 Jahre Fama-French-Modell: Erklärungsgehalt, Anomalien und praktische Implikationen," Perspektiven der Wirtschaftspolitik, De Gruyter, vol. 18(2), pages 98-116, June.
    4. John H. Cochrane, 2017. "Macro-Finance," Review of Finance, European Finance Association, vol. 21(3), pages 945-985.
    5. Alexander M. Chinco & Adam D. Clark-Joseph & Mao Ye, 2017. "Sparse Signals in the Cross-Section of Returns," NBER Working Papers 23933, National Bureau of Economic Research, Inc.
    6. Franke, Benedikt & Müller, Sebastian & Müller, Sonja, 2017. "The q-factors and expected bond returns," Journal of Banking & Finance, Elsevier, vol. 83(C), pages 19-35.
    7. Wahal, Sunil, 2019. "The profitability and investment premium: Pre-1963 evidence," Journal of Financial Economics, Elsevier, vol. 131(2), pages 362-377.
    8. Anna Kovner & Peter Van Tassel, 2018. "Evaluating regulatory reform: banks’ cost of capital and lending," Staff Reports 854, Federal Reserve Bank of New York.
    9. DeMiguel, Victor & Martin-Utrera, Alberto & Nogales, Francisco J. & Uppal, Raman, 2017. "A Portfolio Perspective on the Multitude of Firm Characteristics," CEPR Discussion Papers 12417, C.E.P.R. Discussion Papers.

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    More about this item

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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