Income Hedging, Dynamic Style Preferences, and Return Predictability

91 Pages Posted: 4 May 2014 Last revised: 10 Oct 2018

See all articles by Jawad M. Addoum

Jawad M. Addoum

Cornell University

Stefanos Delikouras

University of Miami - Department of Finance

George M. Korniotis

University of Miami; Miami Business School; University of Miami - Behavioral Decision Making Cluster

Alok Kumar

University of Miami - School of Business Administration

Date Written: May 25, 2018

Abstract

We propose a theoretical measure of income hedging demand and show that it affects asset prices. We focus on the value factor and first demonstrate that our demand estimates are correlated with the actual demands of retail and mutual fund investors. Then, we show that the aggregate HML demand predicts HML returns. Exploiting the state-level variation in income risk, we demonstrate that state-level hedging demands predict state-level HML returns. A long-short portfolio that exploits this hedging-induced predictability earns an annualized risk-adjusted return of 6%.

Keywords: Income hedging, hedging demand, value factor, state-level income risk, style investing, return predictability

JEL Classification: G11, G12, G17, R2

Suggested Citation

Addoum, Jawad M. and Delikouras, Stefanos and Korniotis, George M. and Kumar, Alok, Income Hedging, Dynamic Style Preferences, and Return Predictability (May 25, 2018). Journal of Finance, Forthcoming; University of Miami Business School Research Paper No. 18-8. Available at SSRN: https://ssrn.com/abstract=2432360 or http://dx.doi.org/10.2139/ssrn.2432360

Jawad M. Addoum (Contact Author)

Cornell University ( email )

Ithaca, NY 14853
United States

Stefanos Delikouras

University of Miami - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

George M. Korniotis

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
305-284-5728 (Phone)

Miami Business School ( email )

University of Miami - Behavioral Decision Making Cluster ( email )

5250 University Drive
Coral Gables, FL 33124
United States

Alok Kumar

University of Miami - School of Business Administration ( email )

514 Jenkins Building
Department of Finance
Coral Gables, FL 33124-6552
United States
305-284-1882 (Phone)

HOME PAGE: http://moya.bus.miami.edu/~akumar

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