New and Old Sorts: Implications for Asset Pricing

69 Pages Posted: 6 Mar 2020 Last revised: 12 Mar 2020

See all articles by Fahiz Baba Yara

Fahiz Baba Yara

New University of Lisbon - Nova School of Business and Economics

Martijn Boons

New University of Lisbon - Nova School of Business and Economics

Andrea Tamoni

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

Date Written: January 31, 2020

Abstract

We study the returns to characteristic-sorted portfolios up to five years after portfolio formation. Among a set of 56 characteristics, we find large pricing errors between the contemporaneous returns of new and old sorts, where new sorts use only the most recent observations of firm characteristics. These relative pricing errors are not captured by existing asset pricing models and have been overlooked by standard tests using only returns to new sorts. Thus, pricing errors across horizons provide new and powerful information to test asset pricing models. Further, we show that these pricing errors are strongly related to a characteristic's market beta and connected to the difference in return between new and old stocks in the characteristic-sorted portfolios. We argue that investors can improve the performance of characteristic-based strategies by considering past observations of firm characteristics.

Keywords: Characteristic-Based Return Predictability, Horizon, Pricing Errors, Tests of Asset Pricing Models, Factors

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)

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

Campus de Campolide
Lisbon, 1099-032
Portugal

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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