by Daniel Akst
Wall Street Journal
November 7, 2012
A wide variety of investment strategies are described in the finance literature, but they do have something in common: after the professors write about them, returns are diminished.
That’s the finding of a couple of finance professors who looked at 82 market anomalies exploited by investors and then described in academic papers. In a working paper, the authors estimate that “the average anomaly’s post-publication return decays by about 35%.”
Mostly this seems to be the result of investors learning about the strategy from the academic papers and trading on it, thereby diminishing the precious anomaly in just the way markets are supposed to work. The effect is most pronounced, the professors write, “in large market capitalization stocks, high dollar volume stocks, low idiosyncratic risk stocks, and stocks that pay dividends.”
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