Short- and Long-Horizon Behavioral Factors
74 Pages Posted: 12 Dec 2017 Last revised: 29 Dec 2018
Date Written: December 29, 2018
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: Suggested Citation