TY - JOUR
T1 - Examining return predictability of industry style portfolios with prior return relative to a benchmark
AU - Noman, Abdullah
AU - Naka, Atsuyuki
AU - Zirek, Duygu
N1 - Publisher Copyright:
© 2016
PY - 2017/2/1
Y1 - 2017/2/1
N2 - 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.
AB - 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.
KW - House money effect
KW - Industry style portfolios
KW - Panel regressions
KW - Return predictability
UR - http://www.scopus.com/inward/record.url?scp=84965020772&partnerID=8YFLogxK
U2 - 10.1016/j.qref.2016.04.010
DO - 10.1016/j.qref.2016.04.010
M3 - Article
AN - SCOPUS:84965020772
SN - 1062-9769
VL - 63
SP - 193
EP - 203
JO - Quarterly Review of Economics and Finance
JF - Quarterly Review of Economics and Finance
ER -