Hostname: page-component-745bb68f8f-b95js Total loading time: 0 Render date: 2025-01-11T22:29:00.885Z Has data issue: false hasContentIssue false
  • English
  • Français

Horizon Pricing

Published online by Cambridge University Press:  29 December 2016

Avraham Kamara ,
Robert A. Korajczyk ,
Xiaoxia Lou  and
Ronnie Sadka
Get access Rights & Permissions [Opens in a new window]

Abstract

The literature documents heterogeneity in the delay of stock price reaction to systematic shocks, implying that asset risk depends on investment horizon. We study the pricing of risk factors across investment horizons. Value (liquidity) risk is priced over intermediate (short) horizons. Conditioning horizon-factor exposures on firm characteristics indicates that characteristics, with the exception of momentum, are not priced beyond their contribution to systematic risk. Long-horizon institutional investors overweight assets with high intermediate-horizon exposures to value risk and high short-horizon exposures to liquidity risk. The results highlight the importance of investment horizon in determining risk premia.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 6 , December 2016 , pp. 1769 - 1793
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Abel, A. B.; Eberly, J. C.; and Panageas, S.. “Optimal Inattention to the Stock Market.” American Economic Review, 97 (2007), 244–249.Google Scholar
Abel, A. B.; Eberly, J. C.; and Panageas, S.. “Optimal Inattention to the Stock Market with Information Costs and Transactions Costs.” Econometrica, 81 (2013), 1455–1481.Google Scholar
Agnew, J.; Balduzzi, P.; and Sundén, A.. “Portfolio Choice and Trading in a Large 401(k) Plan.” American Economic Review, 93 (2003), 193–215.Google Scholar
Ameriks, J., and Zeldes, S. P.. “How Do Household Portfolio Shares Vary with Age?” Working Paper, Columbia University (2004).Google Scholar
Amihud, Y.“Illiquidity and Stock Returns: Cross-Section and Time-Series Effects.” Journal of Financial Markets, 5 (2002), 31–56.CrossRefGoogle Scholar
Badrinath, S. G.; Kale, J. R.; and Noe, T. H.. “Of Shepherds, Sheep, and the Cross-Autocorrelations in Equity Returns.” Review of Financial Studies, 8 (1995), 401–430.Google Scholar
Bandi, F. M.; Garcia, R.; Lioui, A.; and Perron, B.. “A Long-Horizon Perspective on the Cross-Section of Expected Returns.” Working Paper, Johns Hopkins University (2011).Google Scholar
Banz, R. W.“The Relationship between Return and Market Value of Common Stocks.” Journal of Financial Economics, 9 (1981), 3–18.Google Scholar
Barberis, N.“Investing for the Long Run When Returns Are Predictable.” Journal of Finance, 55 (2000), 225–264.Google Scholar
Beber, A.; Driessen, J.; and Tuijp, P.. “Pricing Liquidity Risk with Heterogeneous Investment Horizons.” Working Paper, City University of London (2012).CrossRefGoogle Scholar
Brennan, M. J.; Jegadeesh, N.; and Swaminathan, B.. “Investment Analysis and the Adjustment of Stock Prices to Common Information.” Review of Financial Studies, 6 (1993), 799–824.CrossRefGoogle Scholar
Brennan, M. J., and Zhang, Y.. “Capital Asset Pricing with a Stochastic Horizon.” Working Paper, University of California at Los Angeles (2013).Google Scholar
Campbell, J. Y.; Lo, A. W.; and MacKinlay, A. C.. The Econometrics of Financial Markets. Princeton, NJ: Princeton University Press (1997).CrossRefGoogle Scholar
Campbell, J. Y., and Viceira, L. M.. Strategic Asset Allocation: Portfolio Choice for Long-Term Investors. Oxford, UK: Oxford University Press (2002).CrossRefGoogle Scholar
Carhart, M. M.“On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.Google Scholar
Chakrabarty, B.; Moulton, P. C.; and Trzcinka, C.. “Institutional Holding Periods.” Working Paper, Indiana University (2013).Google Scholar
Chordia, T.; Subrahmanyam, A.; and Tong, Q.. “Have Capital Market Anomalies Attenuated in the Recent Era of High Liquidity and Trading Activity?” Journal of Accounting and Economics, 58 (2014), 41–58.CrossRefGoogle Scholar
Cohen, K. J.; Hawawini, G. A.; Maier, S. F.; Schwartz, R. A.; and Whitcomb, D. K.. “Friction in the Trading Process and the Estimation of Systematic Risk.” Journal of Financial Economics, 12 (1983), 263–278.Google Scholar
Cohen, L., and Lou, D.. “Complicated Firms.” Journal of Financial Economics, 104 (2012), 382–400.Google Scholar
Daniel, K., and Marshall, D.. “Equity-Premium and Risk-Free-Rate Puzzles at Long Horizons.” Macroeconomic Dynamics, 1 (1997), 452–484.Google Scholar
Daniel, K., and Titman, S.. “Evidence on the Characteristics of Cross Sectional Variation in Stock Returns.” Journal of Finance, 52 (1997), 1–33.Google Scholar
Davis, J. L.; Fama, E. F.; and French, K. R.. “Characteristics, Covariances, and Average Returns: 1929 to 1997.” Journal of Finance, 55 (2000), 389–406.CrossRefGoogle Scholar
Dimson, E.“Risk Measurement When Shares Are Subject to Infrequent Trading.” Journal of Financial Economics, 7 (1979), 197–226.Google Scholar
Duffie, D.“Asset Price Dynamics with Slow-Moving Capital.” Journal of Finance, 65 (2010), 1237–1267.Google Scholar
Duffie, D., and Sun, T.. “Transactions Costs and Portfolio Choice in a Discrete-Continuous-Time Setting.” Journal of Economic Dynamics and Control, 14 (1990), 35–51.Google Scholar
Fama, E. F., and French, K. R.. “The Cross-Section of Expected Stock Returns.” Journal of Finance, 48 (1992), 427–465.Google Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.Google Scholar
Fama, E. F., and French, K. R.. “Disappearing Dividends: Changing Firm Characteristics or Lower Propensity to Pay?” Journal of Financial Economics, 60 (2001), 3–43.CrossRefGoogle Scholar
Fama, E. F., and MacBeth, J. D.. “Risk, Return and Equilibrium: Empirical Tests.” Journal of Political Economy, 81 (1973), 607–636.Google Scholar
Ferson, W. E., and Harvey, C. R.. “Fundamental Determinants of National Equity Market Returns: A Perspective on Conditional Asset Pricing.” Journal of Banking & Finance, 21 (1997), 1625–1665.Google Scholar
Gaspar, J.; Massa, M.; and Matos, P.. “Shareholder Investment Horizons and the Market for Corporate Control.” Journal of Financial Economics, 76 (2005), 135–165.Google Scholar
Gilbert, T.; Hrdlicka, C.; Kalodimos, J.; and Siegel, S.. “Daily Data Is Bad for Beta: Opacity and Frequency-Dependent Betas.” Review of Asset Pricing Studies, 4 (2014), 78–117.Google Scholar
Gompers, P. A., and Metrick, A.. “Institutional Investors and Equity Prices.” Quarterly Journal of Economics, 116 (2001), 229–259.CrossRefGoogle Scholar
Hackbarth, D., and Johnson, T.. “Real Options and Risk Dynamics.” Working Paper, University of Illinois at Urbana-Champaign (2014).Google Scholar
Handa, P.; Kothari, S. P.; and Wasley, C.. “The Relation between the Return Interval and Betas: Implication for the Size Effect.” Journal of Financial Economics, 23 (1989), 79–100.Google Scholar
Hou, K.“Industry Information Diffusion and the Lead-Lag Effect in Stock Returns.” Review of Financial Studies, 20 (2007), 1113–1138.Google Scholar
Hou, K., and Moskowitz, T. J.. “Market Frictions, Price Delay, and the Cross-Section of Expected Returns.” Review of Financial Studies, 18 (2005), 981–1020.Google Scholar
Ibbotson, R. G. 2016 Stocks, Bonds, Bills, and Inflation (SBBI) Yearbook. Hoboken, NJ: John Wiley & Sons (2016).Google Scholar
Jagannathan, R., and Wang, Y.. “Lazy Investors, Discretionary Consumption, and the Cross-Section of Stock Returns.” Journal of Finance, 62 (2007), 1623–1661.CrossRefGoogle Scholar
Jegadeesh, N., and Titman, S.. “Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency.” Journal of Finance, 48 (1993), 65–91.Google Scholar
Jorion, P.“Risk Management Lessons from Long-Term Capital Management.” European Financial Management, 15 (2000), 277–300.Google Scholar
Khandani, A. E., and Lo, A. W.. “What Happened to the Quants in August 2007?” Journal of Investment Management, 5 (2007), 5–54.Google Scholar
Khandani, A. E., and Lo, A. W.. “What Happened to the Quants in August 2007? Evidence from Factors and Transactions Data?” Journal of Financial Markets, 14 (2011), 1–46.CrossRefGoogle Scholar
Kothari, S. P.; Shanken, J.; and Sloan, R. G.. “Another Look at the Cross-Section of Expected Stock Returns.” Journal of Finance, 50 (1995), 185–224.Google Scholar
Levhari, D., and Levy, H.. “The Capital Asset Pricing Model and the Investment Horizon.” Review of Economic Studies, 59 (1977), 92–104.Google Scholar
Lintner, J.“The Valuation of Risk Assets and the Selection of Risky Investments in Stock Portfolios and Capital Budgets.” Review of Economics and Statistics, 47 (1965), 13–37.Google Scholar
Litzenberger, R. H., and Ramaswamy, K.. “The Effect of Personal Taxes and Dividends on Capital Asset Prices.” Journal of Financial Economics, 7 (1979), 163–195.Google Scholar
Liu, B.“Network Centrality and Gradual Information Diffusion.” Working Paper, Northwestern University (2014).Google Scholar
Lo, A. W., and MacKinlay, A. C.. “When Are Contrarian Profits Due to Stock Market Overreaction?” Review of Financial Studies, 3 (1990), 175–205.CrossRefGoogle Scholar
Merton, R. C.“An Intertemporal Capital Asset Pricing Model.” Econometrica, 41 (1973), 867–887.Google Scholar
Mitchell, O. S.; Mottola, G. R.; Utkus, S. P.; and Yamaguchi, T.. “The Inattentive Participant: Portfolio Trading Behavior in 401(k) Plans.” Working Paper No. 2006-5, Pension Research Council (2006).Google Scholar
Newey, W. K., and West, K. D.. “A Simple, Positive Semi-Definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.Google Scholar
Pástor, Ľ., and Stambaugh, R. F.. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy, 111 (2003), 642–685.Google Scholar
Roll, R.“A Possible Explanation of the Small Firm Effect.” Journal of Finance, 36 (1981), 879–888.Google Scholar
Scholes, M., and Williams, J.. “Estimating Betas from Nonsynchronous Data.” Journal of Financial Economics, 5 (1977), 309–327.Google Scholar
Sharpe, W. F.“A Theory of Market Equilibrium under Conditions of Risk.” Journal of Finance, 19 (1964), 425–442.Google Scholar
Schwartz, G.“Estimating the Dimension of a Model.” Annals of Statistics, 6 (1978), 461–464.Google Scholar
Treynor, J. L.“Toward a Theory of Market Value of Risky Assets.” Working Paper (1962).Google Scholar
Treynor, J. L.“Toward a Theory of Market Value of Risky Assets.” In Asset Pricing and Portfolio Performance, Korajczyk, R. A., ed. London, UK: Risk Books (1999), 15–22.Google Scholar
Yao, Y.“Momentum, Contrarian, and the January Seasonality.” Journal of Banking & Finance, 36 (2012), 2757–2769.Google Scholar
Zhang, X. F.“Information Uncertainty and Stock Returns.” Journal of Finance, 61 (2006), 105–137.Google Scholar
Supplementary material: File

Kamara supplementary material

Online Appendix

Download Kamara supplementary material(File)
File 131.1 KB