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Title: Capital Gains Overhang with a Dynamic Reference Point
Authors: Riley, Christopher
Summers, Barbara
Duxbury, Darren
First Published: 2019
Publisher: INFORMS (Institute for Operations Research and Management Sciences)
Citation: Management Science, 2019, In Press
Abstract: Financial models incorporating a reference point, such as the Capital Gains Overhang (CGO) model, typically assume it is fixed at the purchase price. Combining experimental and market data, this paper examines whether such models can be improved by incorporating reference point adjustment. Using real stock prices over horizons from 6-months to 5-years, experimental evidence demonstrates that a number of salient points in the prior share price path are key determinants of the reference point, in addition to the purchase price. Market data testing is then undertaken using the CGO model. We show that composite CGO variables, created using a mix of salient points with weights determined in the experiment, have greater predictive power than the traditional CGO variable in both cross-sectional US equity return analysis and when analyzing the performance of double-sorted portfolios. In addition, future trading volume is more sensitive to changes in the composite CGO variables than to the traditional CGO, further emphasizing the importance of adjusting reference points.
ISSN: 0025-1909
Links: TBA
Embargo on file until: 1-Jan-10000
Version: Post-print
Status: Peer-reviewed
Type: Journal Article
Rights: Copyright © 2019, INFORMS (Institute for Operations Research and Management Sciences) . Deposited with reference to the publisher’s open access archiving policy. (
Description: The file associated with this record is under embargo until publication, in accordance with the publisher's self-archiving policy. The full text may be available through the publisher links provided above.
Appears in Collections:Published Articles, Dept. of Economics

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