Replicating Anomalies

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Authors of the Article

  • Kewei Hou, Fisher College of Business, The Ohio State University; China Academy of Financial Research (CAFR)
  • Chen Xue, Lindner College of Business, University of Cincinnati
  • Lu Zhang, Fisher College of Business, The Ohio State University; NBER

Publication Year



  • Most infringements to market efficiency identified by academic research are actually flukes. The market anomalies comprise variables for: momentum, value versus growth, investment, profitability, intangibles, trading frictions (among which liquidity).
  • Most academic papers finding market anomalies abuse of equal weighting, hence overweighting small cap stocks, for which transactions costs are very high (ie. the arbitrages cannot be implemented for these stocks)
  • Overall, financial markets appear more efficient than depicted in the academic litterature


"Our results indicate widespread p-hacking in the anomalies literature. Out of 447 anomalies, 286 (64%) are insignificant at the 5% level. Imposing the cutoff t-value of three proposed by Harvey, Liu, and Zhu (2016) raises the number of insignificant anomalies further to 380 (85%)."
"The biggest casualty is the liquidity literature. In the trading frictions category that contains mostly liquidity variables, 95 out of 102 variables (93%) are insignificant. (...) The distress anomaly is virtually nonexistent in our replication. (...) Even for significant anomalies, such as price momentum and operating accruals, their magnitudes are often much lower than originally reported."
"regressions impose a linear functional form, making them more susceptible to outliers, which most likely are microcaps. Alas, due to high costs in trading these stocks, anomalies in microcaps are more apparent than real. More important, with only 3% of the total market equity, the economic importance of microcaps is small, if not trivial."