Short-term interest rates and stock market anomalies

Paulo Maio, Pedro Santa-Clara

Research output: Contribution to journalArticle

11 Citations (Scopus)

Abstract

We present a simple 2-factor model that helps explain several capital asset pricing model (CAPM) anomalies (value premium, return reversal, equity duration, asset growth, and inventory growth). The model is consistent with Merton's intertemporal CAPM (ICAPM) framework, and the key risk factor is the innovation on a short-term interest rate, the federal funds rate, or the T-bill rate. This model explains a large fraction of the dispersion in the average returns of the joint market anomalies. Moreover, the model compares favorably with alternative multifactor models widely used in the literature. Hence, short-term interest rates seem to be relevant for explaining several dimensions of cross-sectional equity risk premia.

Original languageEnglish
Pages (from-to)927-961
Number of pages35
JournalJournal of Financial and Quantitative Analysis
Volume52
Issue number3
DOIs
Publication statusPublished - 1 Jun 2017

Keywords

  • Asset pricing models
  • cross-sectional regression
  • monetary-policy
  • risk-factors
  • return predictability
  • specification errors
  • dissecting anomalies
  • business conditions
  • Intertemporal CAPM
  • DIVIDEND YIELDS

Fingerprint Dive into the research topics of 'Short-term interest rates and stock market anomalies'. Together they form a unique fingerprint.

Cite this