The Two-Year Effect
30 Pages Posted: 25 Aug 2008 Last revised: 13 Jan 2009
Date Written: December 2008
This paper identifies a puzzling form of predictability in U.S. stock market portfolios. For the value weighted market index, those years that follow a low return two years earlier have an average return 11.6% higher than those years that follow a high return two years earlier. The difference in returns is economically and statistically significant. This Two-Year Effect is not concentrated in January, nor is it a small-cap effect. The phenomenon cannot be explained by macroeconomic business cycle variables related to expected returns, or by the four-year U.S. presidential election cycle.
Keywords: Mean reversion, Predictability, Asset pricing
JEL Classification: JEL classification: G10, G11, G12, G14
Suggested Citation: Suggested Citation