Lin Sun

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 supplement the market factor with two mispricing factors which capture long- and short-horizon mispricing. Our financing factor is based on evidence that managers exploit long-horizon mispricing by issuing or repurchasing equity. Our earnings surprise factor, which is motivated by evidence of limited attention and short-horizon mispricing, captures short-horizon anomalies. Our three-factor risk-and-behavioral model outperforms both traditional and other prominent factor models in explaining a large set of return anomalies.