Posted: 14 Jul 2012 Last revised: 6 Mar 2013
Date Written: July 19, 2012
This paper studies the pricing of commonly used systematic risk factors across investment horizons of up to five years. In a classical one-period asset-pricing model, high expected returns are achieved only by accepting high levels of systematic risk. However, allowing for heterogeneous investment horizons across investors, some risks that are important to investors over a particular horizon may seem less consequential to investors facing a different investment horizon. We find that liquidity risk is priced over short horizons of up to six months while market risk is priced over intermediate horizons of up to a year. Value/growth is priced as a non-risk-based characteristic at short horizons, while it shows properties of both a risk factor and a characteristic at long horizons. Size and momentum are priced as characteristics rather than risk factors 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, G14
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