Persistent and transitory components of firm characteristics: Implications for asset pricing

Fahiz Baba Yara, Martijn Boons, Andrea Tamoni

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We study the horizon-dimension of cross-sectional return predictability through the lens of a model where characteristics contain 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 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 model and test implications for firms' long-term discount rates.
Original languageEnglish
Pages (from-to)103808
JournalJournal of Financial Economics
Volume154
DOIs
Publication statusPublished - Apr 2024

Keywords

  • charateristics
  • persistent-transitory decomposition
  • cross-sectional return predictability
  • discount rates
  • asset pricing tests

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