58 Pages Posted: 17 Jan 2012 Last revised: 10 Feb 2017
Date Written: February 7, 2017
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: 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