Past returns and the perceived Sharpe ratio

Guy Kaplanski, Haim Levy, Chris Veld and Yulia Veld-Merkoulova

Journal of Economic Behavior & Organization, 2016, vol. 123, issue C, 149-167

Abstract: We find that human perception contradicts the market efficiency assertions that high expected returns are accompanied by high risk and that past returns are not correlated with future returns. A survey of investors reveals that the last month realized returns are positively correlated with next month perceived returns and that they are negatively correlated with perceived risk. Neither expected return nor perceived risk captures the entire effect. Thus, in the human mind the “perceived Sharpe ratio” is positively correlated with short-term past returns. The effect does not depend on gender, education, income, and portfolio value, but it is more profound among older investors.

Keywords: Expected return; Perceived risk; Perceived Sharpe ratio; Market efficiency; Random walk (search for similar items in EconPapers)
JEL-codes: D81 G02 G10 G14 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:123:y:2016:i:c:p:149-167

DOI: 10.1016/j.jebo.2015.11.010

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