Short- and Long-Horizon Behavioral Factors
71 Pages Posted: 12 Dec 2017 Last revised: 18 Apr 2018
Date Written: March 1, 2018
Recent theories suggest that both risk and mispricing are associated with commonality in security returns, and that the loadings on characteristic-based factors can be used to predict future returns. We supplement the market factor with two mispricing factors which capture long- and short-horizon mispricing. Our financing factor is based on evidence that managers exploit long-horizon mispricing by issuing or repurchasing equity. Our earnings surprise factor, which is motivated by evidence of limited attention and short-horizon mispricing, captures short-horizon anomalies. Our three-factor risk-and-behavioral model outperforms both traditional and other prominent factor models in explaining a large set of return anomalies.
Keywords: Factor Models, Anomalies, Behavioral Factors
JEL Classification: G12, G14
Suggested Citation: Suggested Citation