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Capital Gains Overhang with a Dynamic Reference Point

Lookup NU author(s): Professor Darren DuxburyORCiD



This work is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0).


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.

Publication metadata

Author(s): Riley C, Summers B, Duxbury D

Publication type: Article

Publication status: Published

Journal: Management Science

Year: 2020

Volume: 66

Issue: 10

Pages: 4726-4745

Print publication date: 01/10/2020

Online publication date: 05/02/2020

Acceptance date: 09/05/2019

Date deposited: 20/05/2019

ISSN (print): 0025-1909

ISSN (electronic): 1526-5501

Publisher: Institute for Operations Research and the Management Sciences


DOI: 10.1287/mnsc.2019.3404


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