Betting on Total Asset Growth Reversal: The Role of Style Investing and Extrapolation Bias
F.Y. Eric C. Lam
Hong Kong Baptist University (HKBU) - Department of Finance and Decision Sciences; Hong Kong University of Science & Technology (HKUST) - Department of Finance
K. C. John Wei
Hong Kong University of Science & Technology (HKUST) - Department of Finance
August 15, 2014
AFA 2013 San Diego Meetings Paper
We examine implications of investors’ extrapolation bias combined with irrational demand for stocks based on asset growth categorization and fund reallocation driven by migration of stocks across these salient styles. The conventional long-short strategy is essentially a simple bet on cross-sectional mean reversion in asset growth, which is a necessary condition for the asset growth effect. When the initial sign of asset growth reversal is strong (weak) prior to the holding period, the asset growth effect is weak (strong). Finally, when past information is incorporated to improve the signal of asset growth reversal, the asset growth effect more than doubles.
Number of Pages in PDF File: 59
Keywords: Asset growth reversal, Capital investment, Cross section of stock return, Mean reversion
JEL Classification: G14, G31, G32, M41, M42
Date posted: January 20, 2012 ; Last revised: August 15, 2014
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