1. The Excess Returns of 'Quality' Stocks: A Behavioral Anomaly
- Author
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Jean-Philippe Bouchaud, Stefano Ciliberti, augustin landier, Guillaume Simon, David Thesmar, Capital Fund Management (CFM), Capital Fund Management, Toulouse School of Economics (TSE), École des hautes études en sciences sociales (EHESS)-Institut National de la Recherche Agronomique (INRA)-Centre National de la Recherche Scientifique (CNRS)-Université Toulouse 1 Capitole (UT1), Université Fédérale Toulouse Midi-Pyrénées-Université Fédérale Toulouse Midi-Pyrénées, Université Toulouse - Jean Jaurès (UT2J), Groupement de Recherche et d'Etudes en Gestion à HEC (GREGH), Ecole des Hautes Etudes Commerciales (HEC Paris)-Centre National de la Recherche Scientifique (CNRS), HEC Paris Research Paper Series, and Haldemann, Antoine
- Subjects
FOS: Economics and business ,JEL: G - Financial Economics/G.G1 - General Financial Markets/G.G1.G14 - Information and Market Efficiency • Event Studies • Insider Trading ,behavioral biases ,Portfolio Management (q-fin.PM) ,JEL: G - Financial Economics/G.G2 - Financial Institutions and Services/G.G2.G20 - General ,JEL: G - Financial Economics/G.G0 - General/G.G0.G00 - General ,[SHS.GESTION]Humanities and Social Sciences/Business administration ,General Finance (q-fin.GN) ,[SHS.GESTION] Humanities and Social Sciences/Business administration ,Quantitative Finance - General Finance ,Quality anomaly ,Quantitative Finance - Portfolio Management ,financial analysts misplaced focus - Abstract
This note investigates the causes of the quality anomaly, which is one of the strongest and most scalable anomalies in equity markets. We explore two potential explanations. The "risk view", whereby investing in high quality firms is somehow riskier, so that the higher returns of a quality portfolio are a compensation for risk exposure. This view is consistent with the Efficient Market Hypothesis. The other view is the "behavioral view", which states that some investors persistently underestimate the true value of high quality firms. We find no evidence in favor of the "risk view": The returns from investing in quality firms are abnormally high on a risk-adjusted basis, and are not prone to crashes. We provide novel evidence in favor of the "behavioral view": In their forecasts of future prices, and while being overall overoptimistic, analysts systematically underestimate the future return of high quality firms, compared to low quality firms., 11 pages, 1 figure, 2 tables