Short and Long Horizon Behavioral Factors

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. ∗Daniel: Columbia Business School and NBER; Hirshleifer: Merage School of Business, UC Irvine and NBER; Sun: Florida State University. We appreciate helpful comments from Jawad Addoum (FIRS discussant), Chong Huang, Danling Jiang, Frank Weikai Li (CICF discussant), Anthony Lynch (SFS-Cavalcade discussant), Stefan Nagel, Christopher Schwarz, Zheng Sun, Siew Hong Teoh, Yi Zhang (FMA discussant), Lu Zheng, seminar participants at UC Irvine, University of Nebraska, Lincoln, Florida State University, and from participants in the FIRS meeting at Quebec City, Canada, the FMA meeting at Nashville, TN, the SFS Cavalcade North America meeting at Vanderbilt University, and the China International Conference in Finance at Hangzhou.