Valuewalk.com
0
All posts from Valuewalk.com
Valuewalk.com in Valuewalk.com,

Winton: Value, Size And Momentum On Equity Indices – A Likely Example Of Selection Bias

Value, Size And Momentum On Equity Indices - A Likely Example Of Selection Bias by Winton Global Capital Management

by Allan Evans, PhD, Senior Researcher and Carsten Schmitz, PhD, Head of Research (Zurich)

Abstract:

Value, size and momentum have a long history as stock price predictors, and similar indicators have been applied to stock indices in order to predict the performance of one national index against another. Published back tests of trading systems based on these ideas have shown impressive performance, but in this paper we find that this performance does not continue past the publication dates.

We argue that selection bias at the time of publication has a part to play in the disappointing out?of?sample performance of these indicators. We show how the combination of estimation uncertainty and selective reporting can readily explain the observed deterioration in performance. Importantly, with a fuller understanding of these effects, the long?term poor performance of the indicators could have been anticipated at the time.

Value, Size And Momentum On Equity Indices - A Likely Example Of Selection Bias - Introduction

Efforts to find predictors for stock returns have a long history. Quantitative work on momentum goes back at least to the 1960s, with the observation that, over timescales of a few months, stocks that performed well in the past tend to also perform well in the future [1]. Later work showed some evidence for a negative effect (mean reversion) on a longer...


More