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Income Hedging, Dynamic Style Preferences, and Return Predictability

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  • JAWAD M. ADDOUM
  • STEFANOS DELIKOURAS
  • GEORGE M. KORNIOTIS
  • ALOK KUMAR

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%.

Suggested Citation

  • Jawad M. Addoum & Stefanos Delikouras & George M. Korniotis & Alok Kumar, 2019. "Income Hedging, Dynamic Style Preferences, and Return Predictability," Journal of Finance, American Finance Association, vol. 74(4), pages 2055-2106, August.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:4:p:2055-2106
    DOI: 10.1111/jofi.12775
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    Cited by:

    1. Alex Borodin & Galina Panaedova & Svetlana Frumina & Aidyn Kairbekuly & Natalia Shchegolevatykh, 2021. "Modeling the Business Environment of an Energy Holding in the Formation of a Financial Strategy," Energies, MDPI, vol. 14(23), pages 1-18, December.
    2. Muhammad Abubakr Naeem & Mudassar Hasan & Muhammad Arif & Syed Jawad Hussain Shahzad, 2020. "Can Bitcoin Glitter More Than Gold for Investment Styles?," SAGE Open, , vol. 10(2), pages 21582440209, May.
    3. d'Astous, Philippe & Shore, Stephen H., 2024. "Human capital risk and portfolio choices: Evidence from university admission discontinuities," Journal of Financial Economics, Elsevier, vol. 154(C).

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