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Short-Term Interest Rates and Stock Market Anomalies

58 Pages Posted: 17 Jan 2012 Last revised: 10 Feb 2017

Paulo F. Maio

Hanken School of Economics - Department of Finance and Statistics

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)

Date Written: February 7, 2017

Abstract

We present a simple 2-factor model that helps explaining several capital asset pricing model (CAPM) anomalies (value premium, return reversal, equity duration, asset growth, and inventory growth). The model is consistent with Merton's intertemporal CAPM (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.

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

Suggested Citation

Maio, Paulo F. and Santa-Clara, Pedro, Short-Term Interest Rates and Stock Market Anomalies (February 7, 2017). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1986787 or http://dx.doi.org/10.2139/ssrn.1986787

Paulo F. Maio (Contact Author)

Hanken School of Economics - Department of Finance and Statistics ( email )

FI-00101 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)

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Cambridge, MA 02138
United States

Centre for Economic Policy Research (CEPR) ( email )

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London, EC1V 3PZ
United Kingdom

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