New and Old Sorts: Implications for Asset Pricing

81 Pages Posted: 6 Mar 2020 Last revised: 14 May 2021

See all articles by Fahiz Baba Yara

Fahiz Baba Yara

New University of Lisbon - Nova School of Business and Economics

Martijn Boons

Tilburg University

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: January 31, 2020

Abstract

For many characteristics, like book-to-market, the persistence of return predictability does not match the persistence of the characteristic. Consequently, large alphas exist between new and old sorts, where new (old) sorts capture the return of a characteristic-sorted portfolio immediately (longer) after portfolio formation. These alphas (i) translate into large improvements in Sharpe ratio, (ii) are not captured by benchmark asset pricing models, and (iii) are linked to the return differential between new and old stocks. Since portfolios of new and old stocks are characteristic-neutral, we conclude that explanations of the cross-section based on recent observations of characteristics (and factors derived therefrom) are incomplete.

Keywords: Characteristics, Persistence, Cross-Sectional Return Predictability, Test Assets, Factor Models

JEL Classification: G11, G12

Suggested Citation

Baba Yara, Fahiz and Boons, Martijn and Tamoni, Andrea, New and Old Sorts: Implications for Asset Pricing (January 31, 2020). Available at SSRN: https://ssrn.com/abstract=3529140 or http://dx.doi.org/10.2139/ssrn.3529140

Fahiz Baba Yara

New University of Lisbon - Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

Martijn Boons (Contact Author)

Tilburg University ( email )

P.O. Box 90153
Tilburg, DC Noord-Brabant 5000 LE
Netherlands

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

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