What is abnormal return persistence an indicator of?

Abnormal return persistence refers to the phenomenon where an investment's superior performance (abnormal returns) continues over time, suggesting that past performance can be a predictor of future results. This is significant because it challenges the efficient market hypothesis, which posits that all available information is already factored into stock prices, making future returns largely independent of past performance.

When an investment exhibits abnormal return persistence, it implies that the factors contributing to its past performance—whether they be strategic advantages, managerial skills, or other underlying attributes—may continue to play a role in driving future outcomes. This is particularly valuable for investors who are actively seeking investments that can consistently outperform the market, as it suggests that there may be patterns or competitive advantages that are sustainable in the long term.

By recognizing this persistence, investors can make more informed decisions and potentially enhance their investment strategies based on historical performance indicators. In contrast, the other choices do not directly align with the concept of abnormal return persistence—random chance does not account for sustained performance, irregular activity does not imply future success, and market saturation does not address the predictability of returns based on history.