TY - JOUR
T1 - Persistent and transitory components of firm characteristics
T2 - Implications for asset pricing
AU - Baba-Yara, Fahiz
AU - Boons, Martijn
AU - Tamoni, Andrea
N1 - Funding Information:
Nikolai Roussanov was the editor for this article and we thank him for his invaluable guidance. Further, we are grateful to an anonymous referee, Fernando Anjos, Jonathan Berk, Kent Daniel (discussant) Esther Eiling, Rik Frehen, Jens Kværner, Juhani Linnainmaa, Lars Lochstoer, Tyler Muir, Dino Palazzo (discussant), Florian Peters, Simon Rottke, Chi-Yang Tsou (discussant) and seminar participants at the 2021 American Finance Association, 2022 European Finance Association, Morgan Stanley London, 2020 Northern Finance Association, Quoniam Asset Management Frankfurt, Rutgers Business School, Tilburg University, University of Amsterdam, University of Houston, Vienna Graduate School of Finance and Vrije Unversiteit Amsterdam for helpful comments. This paper is based upon work supported by the Dutch Research Council (NWO Vidi grant 201005 ).
Funding Information:
Nikolai Roussanov was the editor for this article and we thank him for his invaluable guidance. Further, we are grateful to an anonymous referee, Fernando Anjos, Jonathan Berk, Kent Daniel (discussant) Esther Eiling, Rik Frehen, Jens Kværner, Juhani Linnainmaa, Lars Lochstoer, Tyler Muir, Dino Palazzo (discussant), Florian Peters, Simon Rottke, Chi-Yang Tsou (discussant) and seminar participants at the 2021 American Finance Association, 2022 European Finance Association, Morgan Stanley London, 2020 Northern Finance Association, Quoniam Asset Management Frankfurt, Rutgers Business School, Tilburg University, University of Amsterdam, University of Houston, Vienna Graduate School of Finance and Vrije Unversiteit Amsterdam for helpful comments. This paper is based upon work supported by the Dutch Research Council (NWO Vidi grant 201005).
Publisher Copyright:
© 2024 The Author(s)
PY - 2024/4
Y1 - 2024/4
N2 - We study the horizon dimension of cross-sectional return predictability using a model where characteristics contain both persistent and transitory components. We test the implications of this model for the average returns of popular characteristic-based trading strategies at short versus long horizons after portfolio formation. Our evidence supports the claim that the relative compensation for persistent and transitory components varies across characteristics, in both magnitude and sign. Benchmark factor models cannot explain the returns of portfolios sorted on characteristics where either the persistent or transitory component is dominant. Finally, we discuss implications for the long-term discount rates of firms.
AB - We study the horizon dimension of cross-sectional return predictability using a model where characteristics contain both persistent and transitory components. We test the implications of this model for the average returns of popular characteristic-based trading strategies at short versus long horizons after portfolio formation. Our evidence supports the claim that the relative compensation for persistent and transitory components varies across characteristics, in both magnitude and sign. Benchmark factor models cannot explain the returns of portfolios sorted on characteristics where either the persistent or transitory component is dominant. Finally, we discuss implications for the long-term discount rates of firms.
KW - Characteristics
KW - Cross-section
KW - Discount rates
KW - Persistent-transitory decomposition
KW - Return predictability
UR - http://www.scopus.com/inward/record.url?scp=85186561947&partnerID=8YFLogxK
U2 - 10.1016/j.jfineco.2024.103808
DO - 10.1016/j.jfineco.2024.103808
M3 - Article
AN - SCOPUS:85186561947
SN - 0304-405X
VL - 154
JO - Journal of Financial Economics
JF - Journal of Financial Economics
M1 - 103808
ER -