Short- and Long-Horizon Behavioral Factors

Kent Daniel, David Hirshleifer, and Lin Sun

March, 2017

Abstract:

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 offer a parsimonious model which features: (1) a factor motivated by limited attention that is dominant in explaining short-horizon anomalies, and (2) a factor motivated by overconfidence that is dominant in explaining long-horizon anomalies. Our three-factor risk-and-behavioral composite model outperforms both standard models and recent prominent factor models in explaining a large set of robust return anomalies.

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