A Dynamic Model of Characteristic-Based Return Predictability / Aydoğan Alti, Sheridan Titman.

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Alti, Aydoğan

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w25777.Publication details: Cambridge, Mass. National Bureau of Economic Research 2019.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: 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.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w25777 (Browse shelf(Opens below))	Not For Loan

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April 2019.

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.