 Capital mobility and the long-run return–risk trade-offs of industry portfoliosJia Chen, Xin Xu and Tong Yao Journal of Empirical Finance, 2023, vol. 70, issue C, 123-143 Abstract: Capital mobility may equalize investment opportunities across industries and cause the return–risk trade-offs of industry portfolios to converge. We show that over a long sample period, value-weighted industry portfolios have Sharpe ratios statistically indistinguishable from each other. We further show that industry Sharpe ratios exhibit mean-reversion that can be attributed to cross-industry capital mobility. An investment strategy explicitly based on equalized industry Sharpe ratios significantly outperforms the market. Its performance cannot be explained by the traditional empirical asset pricing models but is readily explained by the q-factor model. Our findings suggest that capital mobility and investment-based asset pricing have important implications on the long-run return–risk trade-off in the financial market. Keywords: Industry portfolio; Sharpe ratio; Maximum diversification strategy; Investment-based asset pricing; Q-factors (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:70:y:2023:i:c:p:123-143 DOI: 10.1016/j.jempfin.2022.11.004 Access Statistics for this article Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff More articles in Journal of Empirical Finance from Elsevier |
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