Recency Bias and the Cross-Section of International Stock Returns
52 Pages Posted: 1 May 2021 Last revised: 29 Jun 2021
Date Written: April 23, 2021
Investors often focus their attention on recent information only, underestimating the relevance of information from the distant past. In consequence, the ordering of historical returns robustly predicts future stock performance in the cross-section. Using data from 49 countries, we comprehensively examine this anomaly within international markets. A value-weighted spread portfolio of global stocks that is formed on chronological return ordering earns 0.91% per month. The effect is distinctly robust and prevails among the biggest and most liquid companies. The mispricing is particularly strong in countries that are characterized by high individualism and shareholder protection. Furthermore, the return predictability is concentrated following down markets and periods of excessive volatility.
Keywords: chronological return ordering, recency bias, behavioral finance, the cross-section of stock returns, asset pricing, return predictability, international markets; individualism, shareholder protection, market crashes
JEL Classification: G11, G12, G14, G15
Suggested Citation: Suggested Citation