Post-Fundamentals Price Drift in Capital Markets: A Regression Regularization Perspective
Management Science, forthcoming
80 Pages Posted: 27 Jan 2020 Last revised: 19 May 2021
Date Written: January 8, 2020
Regression regularization techniques show that deviations of accounting fundamentals from their preceding moving averages forecast drifts in equity market prices. The deviations-based predictability survives a comprehensive set of prominent anomalies. The profitability applies strongly to the long-leg and survives value-weighting and excluding microcaps. We provide evidence that the predictability arises because investors anchor to recent means of fundamentals.
A factor based on our fundamentals-based index yields economically significant intercepts after controlling for a comprehensive set of other factors, including those based on profit margins and earnings drift.
JEL Classification: G12, G14
Suggested Citation: Suggested Citation