One oft-heard concern on factor investing is that factors could be arbitraged away. Indeed, studies on the US equity market suggest that market anomalies become weaker after publication, with performance deteriorating by over 50%.
This study1, however, found that these results do not carry over to international equity markets. The authors examined over 200 anomalies for 39 countries and found that only the US exhibited a post-publication performance drop. None of the other countries showed noticeable decline in performance, or even a slight improvement. The authors considered the various explanations for these conflicting results.
They dismissed most of these, but found weak evidence supporting the notion that anomalies are more difficult to arbitrage away internationally. We suggest a different explanation, namely that most anomaly studies focus on the US market and have been optimized to produce the best results there. Such data fitting would explain why subsequent performance is weaker in the US market, but not in other markets where the strategies were not initially tested.
1 Jacobs & Müller, ‘Anomalies Across the Globe: Once Public, No Longer Existent?’, SSRN working paper, no. 2816490, 201.
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