University of Amsterdam
Plantage Muidergracht 12
1018 TV Amsterdam
Institutional Affiliation: University of Amsterdam
Information about this author at RePEc
NBER Working Papers and Publications
|December 2018||Overconfidence, Information Diffusion, and Mispricing Persistence|
with , : w25346
We propose a dynamic heterogeneous agents model which generates testable hypotheses about the formation, timing and bursting of asset price bubbles in the presence of short-sale constraints, given a calibration that is consistent with momentum and reversal effects for unconstrained assets. Consistent with the model, all short-sale constrained stocks earn strong negative risk-adjusted returns in the first year after portfolio formation. However, the calibrated model predicts strong differences in the mispricing persistence of past-winners and losers. After one year, the alpha of past-losers is approximately zero (0.23%/mo, t=0.85), while the alpha for past-winners is -0.75%/mo (t=-5.82) over the following four years.
|December 2017||The Cross-Section of Risk and Return|
with , , : w24164
In the finance literature, a common practice is to create characteristic portfolios by sorting on characteristics associated with average returns. We show that the resulting portfolios are likely to capture not only the priced risk associated with the characteristic, but also unpriced risk. We develop a procedure to remove this unpriced risk using covariance information estimated from past returns. We apply our methodology to the five Fama and French (2015) characteristic portfolios. The squared Sharpe ratio of the optimal combination of the resulting characteristic efficient portfolios is 2.16, compared with 1.16 for the original characteristic portfolios.
Published: Kent Daniel & Lira Mota & Simon Rottke & Tano Santos & Andrew Karolyi, 2020. "The Cross-Section of Risk and Returns," The Review of Financial Studies, vol 33(5), pages 1927-1979.