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Academics Cast Doubt on the Financial Research Tracking Stock Market Anomalies

An academic paper tested many well-known stock market anomalies that have beaten the market in the past and dismissed many as either wrong or insignificant. The authors acknowledged the steady growth of factor-based ETFs since the mid-1990s and noted: “As factor investing becomes increasingly important, the financial press has rightfully called into question the reliability of the underlying academic research.” The authors’ research found that out of 447 anomalies studied, 286 were insignificant and that for the 161 significant anomalies found, their magnitudes were often much lower than originally reported. A Wall Street Journal report on the study noted that the findings are not all bad news for investors and that the authors’ research show that the most popular factors have outperformed the market over long periods after “rigorous tests” even though the research found much smaller returns than the estimates from previous studies. The market anomalies, or factors, that passed the researcher’s tests included value stocks and high-quality of earnings. Meanwhile, the Financial Times reported that smart-beta funds saw a 2000% increase in new investor money in the first quarter of 2017.