The disappearance of style in the US equity market

Abstract

This paper investigates the modelling of style returns in the US and the returns to style "tilts" based on forecasts of enhanced future style returns. We use hidden Markov model to build our forecasts. Our finding that style returns are less forecastible in more recent years is consistent with the hypothesis that style returns are the result of anomalies rather than risk premia. The erosion of anomalous returns as public awareness of their presence is translated into strategies that arbitrage away the excess returns seems to be a hypothesis consistent with our modelling results