A Unified Duration-based Explanation of the Value, Profitability, and Investment Anomalies

Abstract

Two duration factors that arise from the downward-sloping term structure of equity returns explain the value, profitability, and investment premiums. One factor captures the spread of returns between short and long durations, and the other measures the difference in risk premiums associated with duration transitions. These duration effects jointly subsume the explanatory power of the value, profitability, and investment in the cross-section of equity returns. Our study shows that these three and other related anomalies can be unified in a risk-based framework. These anomalies may arise from the dynamic relations between firms’ durations and their fundamentals.

Keywords: Equity Duration, Duration Transition, Term Structure of Equity Returns, Value Premium, Profitability Premium, Investment Premium

JEL Classification: G11, G12