The Impact of Recency Effects on Stock Market Prices

76 Pages Posted: 7 Mar 2018 Last revised: 6 Apr 2019

See all articles by Hannes Mohrschladt

Hannes Mohrschladt

University of Muenster - Finance Center

Date Written: April 4, 2019

Abstract

Experimental evidence shows that recent observations have a stronger impact on the formation of beliefs than observations from the more distant past. Thus, if investors judge upon a stock's attractiveness based on historical return data, they presumably overweight the most recent returns. Based on this simple idea, we propose a new empirical measure of recency adjustment that reflects the ordering of previous returns. Based on the conjectured behavioral mechanisms, recency adjustment should be systematically related to stock mispricing. We use US stock market data from 1926 to 2016 to support this hypothesis empirically and show that recency adjustment is a strong predictor for the cross-section of subsequent returns.

Keywords: Behavioral Finance, Recency Effect, Cross-Section of Stock Returns, Return Predictability

JEL Classification: G02, G12, G14

Suggested Citation

Mohrschladt, Hannes, The Impact of Recency Effects on Stock Market Prices (April 4, 2019). 31st Australasian Finance and Banking Conference 2018; Paris December 2018 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=3131713 or http://dx.doi.org/10.2139/ssrn.3131713

Hannes Mohrschladt (Contact Author)

University of Muenster - Finance Center ( email )

Universitätsstr. 14-16
Muenster, 48143
Germany

HOME PAGE: http://www.wiwi.uni-muenster.de/fcm/en/the-fcm/lsf/team/hannes-mohrschladt

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