Recency bias and the cross-section of international stock returns

• Published in: Journal of international financial markets, institutions & money institutions & money, 2023-04, Vol.84, p.101738, Article 101738
• Main Authors: Cakici, Nusret, Zaremba, Adam
• Format: Article
• Language: English
• Subjects: ASSET pricing; Behavioral finance; Chronological return ordering; International markets; Recency bias; Return predictability; The cross-section of stock returns
• ISSN: 1042-4431; 1873-0612
• DOI: 10.1016/j.intfin.2023.101738

•The ordering of historical returns reliably predicts international stock returns.•A global long-short strategy based on this anomaly earns 0.91 % per month.•The effect is robust among the biggest companies but differs across markets.•The anomaly prevails in countries with strong individualism and shareholder protection.•Down markets and high volatility periods also boost the mispricing. Investors often focus on recent information only, underestimating the relevance of data from the distant past. In consequence, the ordering of historical returns reliably predicts future stock performance in the cross-section. Using data from 49 countries, we comprehensively examine this anomaly within international markets. The average return differential between the high and low deciles of global stocks sorted on chronological return ordering equals 0.91 % per month. The effect is distinctly robust among the biggest companies but exhibits substantial international heterogeneity. The mispricing prevails in countries characterized by high individualism and shareholder protection. Furthermore, it is concentrated following down markets and periods of excessive volatility.