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Studying 71 anomalies, we show how the discovery of anomaly reshapes out-of-sample returns, thereby creating a contrarian effect to the general decay in returns. As a result, the average contribution of the first-day return to the portfolio value increases from 3% before the anomaly is discovered to 12% afterward and 30% in case of momentum anomalies. The effect exists in long-side and short-side portfolios and in the bought and sold stocks of both portfolios. The long-lasting effect indicates that arbitrage capital plays a key role in retaining market efficiency in the long run, implying a persistent mispricing component in anomalies. |
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