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Income hedging, dynamic style preferences, and return predictability
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Addoum, Jawad M., Delikouras, Stefanos, Korniotis, George M. and Kumar, Alok (2019) Income hedging, dynamic style preferences, and return predictability. The Journal of Finance , 74 (4). pp. 2055-2106. doi:10.1111/jofi.12775 ISSN 0022-1082.
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Official URL: http://dx.doi.org/10.1111/jofi.12775
Abstract
We propose a theoretical measure of income hedging demand and show that it affects asset prices. We focus on the value factor and first demonstrate that our demand estimates are correlated with the actual demands of retail and mutual fund investors. We then show that the aggregate high‐minus‐low (HML) demand predicts HML returns. Exploiting the state‐level variation in income risk, we demonstrate that state‐level hedging demands predict state‐level HML returns. A long‐short portfolio that exploits this hedging‐induced predictability earns an annualized risk‐adjusted return of 6%.
| Item Type: | Journal Article | ||||||||
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| Divisions: | Faculty of Social Sciences > Warwick Business School | ||||||||
| Journal or Publication Title: | The Journal of Finance | ||||||||
| Publisher: | Wiley-Blackwell Publishing, Inc. | ||||||||
| ISSN: | 0022-1082 | ||||||||
| Official Date: | August 2019 | ||||||||
| Dates: |
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| Volume: | 74 | ||||||||
| Number: | 4 | ||||||||
| Page Range: | pp. 2055-2106 | ||||||||
| DOI: | 10.1111/jofi.12775 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Access rights to Published version: | Restricted or Subscription Access |
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