The correlation structure of anomaly strategies
Geertsema, Paul Lu, Helen
Geertsema, Paul
Lu, Helen
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Publication Type
Journal article with impact factor
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Publication Year
2020
Journal
Journal of Banking & Finance
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Publication Volume
119
Publication Issue
October
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Abstract
We consolidate a large number of mean-significant anomalies into cluster portfolios. More than a third of cluster portfolios remain significant under the Hou et al. (2020) five-factor model — the best performing among six benchmark models tested. A best-first search yields nine factors that subsume all cluster portfolios as well as all significant anomalies, demonstrating the feasibility of a parsimonious description of average realised returns. The expected growth factor (EG) and a cluster portfolio linked to accruals are prominent factors that improve pricing performance. The search-generated model produces a monthly maximum squared Sharpe ratio of 0.51, considerably higher than current benchmark models.
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Keywords
Anomalies, Correlation, Cluster Analysis, Machine Learning, Asset Pricing