Horizon Pricing

31 Pages Posted: 17 Mar 2012

See all articles by Avraham Kamara

Avraham Kamara

University of Washington - Michael G. Foster School of Business

Robert A. Korajczyk

Northwestern University

Xiaoxia Lou

University of Delaware - Alfred Lerner College of Business and Economics

Ronnie Sadka

Boston College - Carroll School of Management

Date Written: March 15, 2012

Abstract

In a classical one-period asset-pricing model, high expected returns are achieved only by accepting high levels of systematic risk. Allowing for heterogenous investment horizons across investors, some risks that require a premium over a particular horizon, may seem less consequential to investors facing a different investment horizon. This paper studies the pricing of commonly used systematic risk factors across investment horizons. We find that liquidity risk exhibits a premium that may constitute abnormal return (alpha) for patient investors because liquidity fluctuations are less apparent for long horizons. In contrast, market, value, and return-on-equity factors are predominantly priced when systematic risk is measured using long horizon returns. While value and return-on-equity appear to be characteristics at short horizons they behave like systematic risk factors at long horizons. Size, momentum, and investment, behave like characteristics at all horizons. The results highlight the importance of considering investment horizon in determining whether a cross-sectional return spread is alpha or a premium for systematic risk.

Keywords: asset pricing model, investment horizon, factors, characteristics

JEL Classification: G1, G12

Suggested Citation

Kamara, Avraham and Korajczyk, Robert A. and Lou, Xiaoxia and Sadka, Ronnie, Horizon Pricing (March 15, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2023937 or http://dx.doi.org/10.2139/ssrn.2023937

Avraham Kamara

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-543-0652 (Phone)
206-221-6856 (Fax)

Robert A. Korajczyk (Contact Author)

Northwestern University ( email )

Kellogg School of Management
2211 Campus Drive, Room 4357
Evanston, IL 60208-0898
United States
847-491-8336 (Phone)
847-491-7781 (Fax)

HOME PAGE: http://www.kellogg.northwestern.edu/faculty/directory/korajczyk_robert.aspx#research

Xiaoxia Lou

University of Delaware - Alfred Lerner College of Business and Economics ( email )

419 Purnell Hall
Newark, DE 19716
United States

Ronnie Sadka

Boston College - Carroll School of Management ( email )

140 Commonwealth Avenue
Chestnut Hill, MA 02467
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
90
Abstract Views
390
PlumX Metrics