A Unified Duration-based Explanation of the Value, Profitability, and Investment Anomalies

60 Pages Posted: 19 Dec 2018 Last revised: 15 Jul 2023

See all articles by Shan Chen

Shan Chen

Southwestern University of Finance and Economics (SWUFE), School of Finance

Tao Li

City University of Hong Kong (CityU) - Department of Economics & Finance

Date Written: November 26, 2018

Abstract

Two duration factors that arise from the downward-sloping term structure of equity returns explain the value, profitability, and investment premiums. One duration factor captures the spread of returns between short and long durations, and the other measures the difference in risk premiums associated with duration transitions. The two duration factors, jointly with the market and size, explain many related anomalies comparable to some leading factor models. Our study shows that these three and many other related anomalies can be unified in a risk-based framework. These anomalies may arise from the dynamic relations between firms’ durations and their fundamentals.

Keywords: Equity Duration, Duration Transition, Term Structure of Equity Returns, Value Premium, Profitability Premium, Investment Premium

JEL Classification: G11, G12

Suggested Citation

Chen, Shan and Li, Tao, A Unified Duration-based Explanation of the Value, Profitability, and Investment Anomalies (November 26, 2018). Available at SSRN: https://ssrn.com/abstract=3290191 or http://dx.doi.org/10.2139/ssrn.3290191

Shan Chen

Southwestern University of Finance and Economics (SWUFE), School of Finance ( email )

Chengdu, 610074
China

Tao Li (Contact Author)

City University of Hong Kong (CityU) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

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