The ordering of historical returns and the cross-section of subsequent returns

Mohrschladt H


Abstract
We show that the ordering of historical stock returns significantly predicts the cross-section of subsequent returns. More specifically, stocks with comparably high recent and low distant returns experience low subsequent returns and vice versa. Our new measure of chronological return ordering yields significant decile return spreads after accounting for a wide range of asset pricing factors. This finding holds for both a monthly and an annual formation period and is valid beyond micro-structure, reversal, and momentum effects. Further analyses on limits to arbitrage, investor attention, and informed option trading support a mispricing-based explanation for parts of the documented return predictability.

Keywords
Behavioral finance; Ordering effects; Cross-section of stock returns; Return predictability



Publication type
Research article (journal)

Peer reviewed
Yes

Publication status
Published

Year
2021

Journal
Journal of Banking and Finance

Volume
125

Pages range
106064

Language
English

ISSN
0378-4266

DOI