A Dynamic Model of Characteristic-Based Return Predictability

Aydoğan Alti and Sheridan Titman

No 25777, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G02 G12 (search for similar items in EconPapers)
Date: 2019-04
New Economics Papers: this item is included in nep-env and nep-fmk
Note: AP
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Citations: View citations in EconPapers (6)

Published as AYDOĞAN ALTI & SHERIDAN TITMAN, 2019. "A Dynamic Model of Characteristic‐Based Return Predictability," The Journal of Finance, vol 74(6), pages 3187-3216.

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