The Performance of Characteristic-Sorted Portfolios: Evaluating the Past and Predicting the Future

70 Pages Posted: 23 Nov 2021 Last revised: 5 May 2024

See all articles by Aydogan Alti

Aydogan Alti

University of Texas at Austin - Department of Finance

Travis L. Johnson

The University of Texas at Austin

Sheridan Titman

University of Texas at Austin - Department of Finance; National Bureau of Economic Research (NBER)

Date Written: May 4, 2024

Abstract

We study the fluctuating performance of characteristic-sorted portfolios through the lens of a statistical model that allows for persistent variation in expected returns. The model provides a simple formula for adjusting the standard errors of unconditional expected return estimates; with plausible persistence parameters, the standard errors double. Similarly, maximum likelihood tests of the model that allow for persistent variation generally fail to reject the hypothesis of zero unconditional expected returns. Finally, our Bayesian analysis of the model shows that with relatively agnostic prior beliefs about the persistence parameters, posterior estimates of expected returns exhibit large fluctuations over time.

Keywords: Portfolio returns, time-variation, autocorrelation, value strategies, return predictability, Bayesian, standard errors

JEL Classification: G10, G11, G12, G14

Suggested Citation

Alti, Aydogan and Johnson, Travis L. and Titman, Sheridan, The Performance of Characteristic-Sorted Portfolios: Evaluating the Past and Predicting the Future (May 4, 2024). Available at SSRN: https://ssrn.com/abstract=3966667 or http://dx.doi.org/10.2139/ssrn.3966667

Aydogan Alti

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

Travis L. Johnson (Contact Author)

The University of Texas at Austin ( email )

2110 Speedway Stop B6600
Austin, TX Texas 78712
United States
6178995325 (Phone)

HOME PAGE: http://travislakejohnson.com

Sheridan Titman

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-232-2787 (Phone)
512-471-5073 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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