Behavioral Heterogeneity in Return Expectations across Equity Style Portfolios

35 Pages Posted: 16 Oct 2018

See all articles by Philip A. Stork

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Milan Vidojevic

VU University Amsterdam, Finance; Robeco Asset Management

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: September 24, 2018

Abstract

We estimate a heterogeneous agent model on five prominent equity investment styles - value, size, profitability, investment, and momentum - and find evidence for behavioral heterogeneity in expected return formation. Our model features two groups of boundedly rational investors, fundamentalists and chartists, whose demand functions for the investment styles depend on their respective expected style return forecasts. The fundamentalists form return expectations using a model based on time-varying stock-level characteristics and dynamic factor premia, and the chartists do so based on heuristics commonly employed by technical analysts, such as moving average rules. Our results cast doubt on the theories that assume perfect rationality of the representative agent in financial markets, and give support to the behavioral theories with heterogeneous agents.

Keywords: behavioral finance, heterogeneous agent models, style investing, asset pricing

JEL Classification: G11, G12, G14

Suggested Citation

Stork, Philip A. and Vidojevic, Milan and Zwinkels, Remco C.J., Behavioral Heterogeneity in Return Expectations across Equity Style Portfolios (September 24, 2018). Available at SSRN: https://ssrn.com/abstract=3254454 or http://dx.doi.org/10.2139/ssrn.3254454

Philip A. Stork

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Milan Vidojevic (Contact Author)

VU University Amsterdam, Finance ( email )

De Boelelaan 1105
Amsterdam
Netherlands

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Remco C.J. Zwinkels

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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