Short- and Long-Horizon Behavioral Factors

Review of Financial Studies, Forthcoming

74 Pages Posted: 12 Dec 2017 Last revised: 13 Sep 2019

See all articles by Kent D. Daniel

Kent D. Daniel

Columbia University - Columbia Business School, Finance; National Bureau of Economic Research (NBER)

David A. Hirshleifer

Marshall School of Business, USC; National Bureau of Economic Research (NBER)

Lin Sun

George Mason University

Date Written: April 8, 2019

Abstract

We propose a theoretically-motivated factor model based on investor psychology and assess its ability to explain the cross-section of U.S. equity returns. Our factor model augments the market factor with two factors which capture long- and short-horizon mispricing. The long-horizon factor exploits the information in managers' decisions to issue or repurchase equity in response to persistent mispricing. The short-horizon earnings surprise factor, which is motivated by investor inattention and evidence of short-horizon underreaction, captures short-horizon anomalies. This three-factor risk-and-behavioral model outperforms other proposed models in explaining a broad range of return anomalies.

Keywords: Factor Models, Anomalies, Behavioral Factors

JEL Classification: G12, G14

Suggested Citation

Daniel, Kent D. and Hirshleifer, David A. and Sun, Lin, Short- and Long-Horizon Behavioral Factors (April 8, 2019). Review of Financial Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3086063 or http://dx.doi.org/10.2139/ssrn.3086063

Kent D. Daniel

Columbia University - Columbia Business School, Finance ( email )

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

David A. Hirshleifer (Contact Author)

Marshall School of Business, USC ( email )

Marshall School of Business
Los Angeles, CA 90089
United States

HOME PAGE: http://https://sites.uci.edu/dhirshle/

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lin Sun

George Mason University ( email )

Fairfax, VA 22030
United States

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