{"title":"Price-Path Convexity, Extrapolation, and Short-Horizon Return Predictability","authors":"Zhi Da, Huseyin Gulen, Michael Woeppel","doi":"10.2139/ssrn.3800419","DOIUrl":null,"url":null,"abstract":"The curvature of intramonth stock price paths, which is distinct from cumulative return over the same period, contains significant additional return predictive power. In the cross section, stocks with the least convex price paths subsequently outperform stocks with the most convex price paths. This effect ranges from 1.34% to 1.53% per month and is not driven by small stocks, the bid-ask bounce, or other short-term return predictors. We find similar results in different time periods, in non-US G7 countries, and even at the aggregate market level. We argue that price-path convexity uniquely captures investor over-extrapolation of recent price changes. Therefore, our results provide broad evidence that extrapolative expectations are an important contributor to short-horizon return predictability.","PeriodicalId":412480,"journal":{"name":"Indiana University Kelley School of Business Research Paper Series","volume":"3 1","pages":"0"},"PeriodicalIF":0.0000,"publicationDate":"2021-06-24","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"2","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"Indiana University Kelley School of Business Research Paper Series","FirstCategoryId":"1085","ListUrlMain":"https://doi.org/10.2139/ssrn.3800419","RegionNum":0,"RegionCategory":null,"ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"","JCRName":"","Score":null,"Total":0}
引用次数: 2
Abstract
The curvature of intramonth stock price paths, which is distinct from cumulative return over the same period, contains significant additional return predictive power. In the cross section, stocks with the least convex price paths subsequently outperform stocks with the most convex price paths. This effect ranges from 1.34% to 1.53% per month and is not driven by small stocks, the bid-ask bounce, or other short-term return predictors. We find similar results in different time periods, in non-US G7 countries, and even at the aggregate market level. We argue that price-path convexity uniquely captures investor over-extrapolation of recent price changes. Therefore, our results provide broad evidence that extrapolative expectations are an important contributor to short-horizon return predictability.