Past returns and the perceived Sharpe ratio

Research output: Contribution to journalArticleResearchpeer-review

5 Citations (Scopus)

Abstract

We find that human perception contradicts the market efficiency assertions that highexpected returns are accompanied by high risk and that past returns are not correlatedwith future returns. A survey of investors reveals that the last month realized returns arepositively correlated with next month perceived returns and that they are negatively correlatedwith perceived risk. Neither expected return nor perceived risk captures the entireeffect. Thus, in the human mind the “perceived Sharpe ratio” is positively correlated withshort-term past returns. The effect does not depend on gender, education, income, andportfolio value, but it is more profound among older investors.
Original languageEnglish
Pages (from-to)149-167
Number of pages19
JournalJournal of Economic Behavior and Organization
Volume123
DOIs
Publication statusPublished - Mar 2016

Keywords

  • expected return
  • perceived risk
  • perceived Sharpe ratio
  • market efficiency
  • random walk

Cite this

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title = "Past returns and the perceived Sharpe ratio",
abstract = "We find that human perception contradicts the market efficiency assertions that highexpected returns are accompanied by high risk and that past returns are not correlatedwith future returns. A survey of investors reveals that the last month realized returns arepositively correlated with next month perceived returns and that they are negatively correlatedwith perceived risk. Neither expected return nor perceived risk captures the entireeffect. Thus, in the human mind the “perceived Sharpe ratio” is positively correlated withshort-term past returns. The effect does not depend on gender, education, income, andportfolio value, but it is more profound among older investors.",
keywords = "expected return, perceived risk, perceived Sharpe ratio, market efficiency, random walk",
author = "Guy Kaplanski and Haim Levy and Veld, {Christianus Henricus} and Yulia Veld-Merkoulova",
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language = "English",
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Past returns and the perceived Sharpe ratio. / Kaplanski, Guy; Levy, Haim; Veld, Christianus Henricus; Veld-Merkoulova, Yulia.

In: Journal of Economic Behavior and Organization, Vol. 123, 03.2016, p. 149-167.

Research output: Contribution to journalArticleResearchpeer-review

TY - JOUR

T1 - Past returns and the perceived Sharpe ratio

AU - Kaplanski, Guy

AU - Levy, Haim

AU - Veld, Christianus Henricus

AU - Veld-Merkoulova, Yulia

PY - 2016/3

Y1 - 2016/3

N2 - We find that human perception contradicts the market efficiency assertions that highexpected returns are accompanied by high risk and that past returns are not correlatedwith future returns. A survey of investors reveals that the last month realized returns arepositively correlated with next month perceived returns and that they are negatively correlatedwith perceived risk. Neither expected return nor perceived risk captures the entireeffect. Thus, in the human mind the “perceived Sharpe ratio” is positively correlated withshort-term past returns. The effect does not depend on gender, education, income, andportfolio value, but it is more profound among older investors.

AB - We find that human perception contradicts the market efficiency assertions that highexpected returns are accompanied by high risk and that past returns are not correlatedwith future returns. A survey of investors reveals that the last month realized returns arepositively correlated with next month perceived returns and that they are negatively correlatedwith perceived risk. Neither expected return nor perceived risk captures the entireeffect. Thus, in the human mind the “perceived Sharpe ratio” is positively correlated withshort-term past returns. The effect does not depend on gender, education, income, andportfolio value, but it is more profound among older investors.

KW - expected return

KW - perceived risk

KW - perceived Sharpe ratio

KW - market efficiency

KW - random walk

U2 - 10.1016/j.jebo.2015.11.010

DO - 10.1016/j.jebo.2015.11.010

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JO - Journal of Economic Behavior and Organization

JF - Journal of Economic Behavior and Organization

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