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Anomalies Abroad: Beyond Data Mining

Last Updated on 10 February, 2024 by Rejaul Karim

The NBER working paper, “Anomalies Abroad: Beyond Data Mining” by Xiaomeng Lu, Robert F. Stambaugh, and Yu Yuan, offers a captivating exploration into the pervasive nature of U.S. equity return anomalies across international stock markets.

This thought-provoking study, spanning 48 pages and last revised in July 2023, sheds light on a pre-specified set of nine prominent U.S. equity return anomalies, revealing compelling evidence of their significant alphas in major international markets such as Canada, France, Germany, Japan, and the U.K.

The robust consistency of these anomalies transcends geographical boundaries, positing profound implications for the understanding of global market dynamics. Furthermore, the findings, underpinned by extensive data from developed stock markets, challenge traditional notions by underscoring the anomalies’ sustained significance even when assuming their alphas to be zero in the U.S., thereby underscoring the pervasive impact of mispricing on international stock returns.

Abstract Of Paper

A pre-specified set of nine prominent U.S. equity return anomalies produce significant alphas in Canada, France, Germany, Japan, and the U.K. All of the anomalies are consistently significant across these five countries, whose developed stock markets afford the most extensive data. The anomalies remain significant even in a test that assumes their true alphas equal zero in the U.S. Consistent with the view that anomalies reflect mispricing, idiosyncratic volatility exhibits a strong negative relation to return among stocks that the anomalies collectively identify as overpriced, similar to results in the U.S.

Original paper – Download PDF

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Author

Xiaomeng Lu
Fudan University, Fanhai International School of Finance

Robert F. Stambaugh
University of Pennsylvania – The Wharton School; National Bureau of Economic Research (NBER)

Yu Yuan
Shanghai Mingshi Investment Company; University of Pennsylvania – Wharton Financial Institutions Center

Conclusion

In summary, “Anomalies Abroad: Beyond Data Mining” by Xiaomeng Lu, Robert F. Stambaugh, and Yu Yuan culminates in a profound testament to the pervasive influence of U.S. equity return anomalies across global stock markets.

The study’s compelling findings reveal the unwavering significance of a pre-specified set of nine prominent U.S. equity return anomalies, substantiating their substantial alphas in prominent international markets such as Canada, France, Germany, Japan, and the U.K. This transcending consistency underscores the profound impact of these anomalies, presenting a compelling narrative of their sustained significance beyond geographical boundaries.

Moreover, the findings convincingly challenge conventional assumptions by demonstrating the anomalies’ resilience in persisting even when their alphas are assumed to be zero in the U.S., thereby underscoring the far-reaching implications of mispricing on international stock returns.

Ultimately, this study offers captivating insights into the dynamics of global markets, highlighting the enduring influence of U.S. equity return anomalies on international investment landscapes.

Related Reading:

Equity Anomalies and Idiosyncratic Risk Around the World

Liquidity Style of Mutual Funds

FAQ

What is the focus of the NBER working paper “Anomalies Abroad: Beyond Data Mining”?

The paper explores the presence and significance of U.S. equity return anomalies in international stock markets. Specifically, it investigates a pre-specified set of nine prominent U.S. equity return anomalies across major international markets such as Canada, France, Germany, Japan, and the U.K.

What are the key findings of the paper regarding U.S. equity return anomalies in international markets?

The paper finds compelling evidence of significant alphas for the selected nine U.S. equity return anomalies in major international markets. These anomalies demonstrate consistent significance across countries, challenging traditional notions and suggesting the pervasive influence of U.S. equity return anomalies beyond geographical boundaries.

How does the paper challenge conventional assumptions about the persistence of anomalies?

The findings challenge conventional assumptions by demonstrating the resilience of the anomalies even when their alphas are assumed to be zero in the U.S. This suggests that the anomalies’ significance persists, challenging traditional notions and highlighting the far-reaching implications of mispricing on international stock returns.

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