Does Academic Research Destroy Stock Return Predictability?
“We study the out-of-sample and post-publication return-predictability of 97 variables that academic studies show to predict cross-sectional stock returns. Portfolio returns are 26% lower out-of-sample and 58% lower post-publication. The out-of-sample decline is an upper bound estimate of data mining effects. We estimate a 32% (58% – 26%) lower return from publication-informed trading. Post-publication declines are greater for predictors with higher in-sample returns, and returns are higher for portfolios concentrated in stocks with high idiosyncratic risk and low liquidity. Predictor portfolios exhibit post-publication increases in correlations with other published-predictor portfolios. Our findings suggest investors learn about mispricing from academic publications.”
McLean, R. David and Pontiff, Jeffrey, Does Academic Research Destroy Stock Return Predictability? (January 7, 2015). Journal of Finance, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2156623 or http://dx.doi.org/10.2139/ssrn.2156623