Department of Finance
McCombs School of Business
University of Texas
Austin, TX 78712
Institutional Affiliation: University of Texas
NBER Working Papers and Publications
|April 2019||A Dynamic Model of Characteristic-Based Return Predictability|
with Sheridan Titman: w25777
We present a dynamic model that links characteristic-based return predictability to systematic factors that determine the evolution of firm fundamentals. In the model, an economy-wide disruption process reallocates profits from existing businesses to new projects and thus generates a source of systematic risk for portfolios of firms sorted on value, profitability, and asset growth. If investors are overconfident about their ability to evaluate the disruption climate, these characteristic-sorted portfolios exhibit persistent mispricing. The model generates predictions about the conditional predictability of characteristic-sorted portfolio returns and illustrates how return persistence increases the likelihood of observing characteristic-based anomalies.
Published: AYDOĞAN ALTI & SHERIDAN TITMAN, 2019. "A Dynamic Model of Characteristic‐Based Return Predictability," The Journal of Finance, vol 74(6), pages 3187-3216.