Capital Asset Pricing with a Stochastic Horizon

Brennan, Michael J.; Zhang, Yuzhao

doi:10.2139/ssrn.1752654

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Capital Asset Pricing with a Stochastic Horizon

Journal of Financial and Quantitative Analysis (JFQA), Forthcoming

92 Pages Posted: 2 Feb 2011 Last revised: 27 Nov 2018

See all articles by Michael J. Brennan

Michael J. Brennan

University of California, Los Angeles (UCLA) - Finance Area

Yuzhao Zhang

Rutgers, The State University of New Jersey - Department of Finance

Date Written: October 11, 2018

Abstract

In this paper we present empirical tests of an extended version of the Capital Asset Pricing Model that replaces the single period horizon with a probability distribution over different horizons. Adopting a simple parameterization of the probability distribution of the length of the horizon, we estimate the parameters of the distribution as well as the parameters of the CAPM. We find that the extended model is not rejected for several different samples of common stocks and for these samples outperforms not only the standard CAPM but also the Fama-French (1993) three-factor model. The probability distribution over horizon dates varies over time with the NYSE turnover rate. We also find that returns satisfy the Euler equation of a representative financial institution that holds the market portfolio and has horizon probabilities that we estimate from 13F filings.

Keywords: Capital, Asset Pricing, Horizon

JEL Classification: G12

Suggested Citation: Suggested Citation

Brennan, Michael John and Zhang, Yuzhao, Capital Asset Pricing with a Stochastic Horizon (October 11, 2018). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1752654 or http://dx.doi.org/10.2139/ssrn.1752654