A Unified Duration-based Explanation of the Value, Profitability, and Investment Anomalies
60 Pages Posted: 19 Dec 2018 Last revised: 15 Jul 2023
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: Suggested Citation