The Return Predictability of Trends
The gambler's fallacy in Rabin (2002) predicts that trends bias investor expectations. We find that trends in earnings are a robust predictor of risk-adjusted returns, with the underreaction of investors to trends providing empirical support for the gambler's fallacy. The return predictability of trends is not attributable to the autocorrelation in earnings surprises nor the magnitude of earnings surprises. Instead, trends explain more than half of the post-earnings announcement drift in our sample.
Trends, Earnings Surprises, Underreaction
Portfolio and Security Analysis
City or Country
Reno, Nevada, USA
LOH, Kiat Roger and WARACHKA, Mitchell Craig.
The Return Predictability of Trends. (2009). FMA meetings. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/1802
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