Working Paper: NBER ID: w24163
Authors: Kent Daniel; David Hirshleifer; Lin Sun
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: behavioral finance; equity returns; factor model; mispricing; investor psychology
JEL Codes: G02; G12; G14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| managerial behavior (D22) | stock price adjustments (G12) |
| investor behavior (G41) | mispricing (D49) |
| long-horizon behavioral factor (fin) (G41) | long-term mispricing (G19) |
| short-horizon behavioral factor (pead) (G41) | short-term mispricing (G14) |
| fin factor (G41) | stock price adjustments (G12) |
| pead factor (C38) | mispricing (D49) |
| three-factor risk-and-behavioral model (G41) | explaining equity returns (G12) |