Understanding Alpha Decay

• 成果类型: Article
• 署名作者: Penasse, Julien
• 署名单位: University of Luxembourg
• 刊物名称: MANAGEMENT SCIENCE
• ISSN/ISSBN: 0025-1909
• DOI: 10.1287/mnsc.2022.4353
• 发表日期: 2022
• 页码: 3966-3973
• 关键词: Anomalies; Cross-sectional return predictability; market efficiency; ASSET PRICING TESTS

摘要

I study the importance of alpha decay for the measurement of realized and conditional expected returns in asset pricing studies. Alpha decay refers to the reduction in abnormal expected returns (relative to an asset pricing model) in response to an anomaly becoming widely known among market participants. As decreases in alpha are associated (ceteris paribus) with positive realized returns, the econometrician may misinterpret these repricing returns as evidence that the anomaly will persist in the future. Because alpha decay is generally a nonstationary phenomenon, asset pricing tests that impose stationarity may lead to biased inference. I illustrate the importance of alpha decay using the most commonly studied anomalies in the asset pricing literature and find that the measured alpha differs from the true alpha by about 1.4% per year. I provide a simple formula to correct for this bias and show how to incorporate alpha decay tests into the standard asset pricing toolkit.