Examining return predictability of industry style portfolios with prior return relative to a benchmark

Abdullah Noman, Atsuyuki Naka, Duygu Zirek

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

This paper investigates the ability of prior returns, relative to aggregate market returns, to predict future returns on industry style portfolios. The results show that past return differential predicts one-month ahead returns negatively, even in the presence of a set of state variables. The predictability is also found to be robust to alternative specifications and estimation methodologies. A possible explanation is related to dynamic loss aversion among investors. More specifically, when combined with the house money effect, prior relative performance has inverse relationship with degree of loss aversion leading to predictability in the next period returns.

Original languageEnglish
Pages (from-to)193-203
Number of pages11
JournalQuarterly Review of Economics and Finance
Volume63
DOIs
StatePublished - 1 Feb 2017

Keywords

  • House money effect
  • Industry style portfolios
  • Panel regressions
  • Return predictability

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