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Digesting unrealized gains and losses in China

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  • Xiong, Tao
  • Wang, Peng

Abstract

Existing researches indicate a V-shaped relationship between unrealized returns and future returns. We propose that investors’ T-strategies change the relationship to be W-shaped. The artificial unrealized return is derived from the turnover rate and stock price. This method splits the return of one investor employing T-strategies into many small increments of profit, resulting in the W-shaped pattern. Applying the tree-based conditional sort to predict future returns, artificial unrealized loss becomes the most important predictor, and the importance of artificial unrealized gain is comparable to other well-known pricing factors. Portfolios based on the predictions can generate an average monthly return of 3.84%, with an adjusted t-value of 3.43. Sharpe ratios, Fama–French alphas, and three kinds of bootstrap simulations confirm the robustness of excess returns.

Suggested Citation

  • Xiong, Tao & Wang, Peng, 2025. "Digesting unrealized gains and losses in China," Finance Research Letters, Elsevier, vol. 86(PE).
    • Handle: RePEc:eee:finlet:v:86:y:2025:i:pe:s1544612325020197
    DOI: 10.1016/j.frl.2025.108765
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