Abstract

http://ssrn.com/abstract=1986787
 
 

References (56)



 


 



Short-Term Interest Rates and Stock Market Anomalies


Paulo F. Maio


Hanken School of Economics

Pedro Santa-Clara


New University of Lisbon - Nova School of Business and Economics; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR)

July 23, 2016


Abstract:     
We present a simple two-factor model that helps explaining several CAPM anomalies -- value premium, return reversal, equity duration, asset growth, and inventory growth. The model is consistent with Merton's ICAPM framework and the key risk factor is the innovation on a short-term interest rate -- the Fed funds rate or the T-bill rate. This model explains a large fraction of the dispersion in average returns of the joint market anomalies. Moreover, the model compares favorably with alternative multifactor models widely used in the literature. Hence, short-term interest rates seem to be relevant for explaining several dimensions of cross-sectional equity risk premia.

Number of Pages in PDF File: 76

Keywords: cross-section of stock returns; asset pricing; intertemporal CAPM; state variables; linear multifactor models; predictability of returns; value premium; long-term reversal in returns; equity duration anomaly; corporate investment anomaly; inventory growth anomaly

JEL Classification: E44, G12, G14


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Date posted: January 17, 2012 ; Last revised: July 25, 2016

Suggested Citation

Maio, Paulo F. and Santa-Clara, Pedro, Short-Term Interest Rates and Stock Market Anomalies (July 23, 2016). Available at SSRN: http://ssrn.com/abstract=1986787 or http://dx.doi.org/10.2139/ssrn.1986787

Contact Information

Paulo F. Maio (Contact Author)
Hanken School of Economics ( email )
Helsinki
Finland

Pedro Santa-Clara
New University of Lisbon - Nova School of Business and Economics ( email )
Lisbon
Portugal
HOME PAGE: http://docentes.fe.unl.pt/~psc/
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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