Horizon Pricing

Posted: 14 Jul 2012 Last revised: 6 Mar 2013

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 19, 2012

Abstract

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

Suggested Citation

Kamara, Avraham and Korajczyk, Robert A. and Lou, Xiaoxia and Sadka, Ronnie, Horizon Pricing (July 19, 2012). Available at SSRN: https://ssrn.com/abstract=2105794 or http://dx.doi.org/10.2139/ssrn.2105794

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

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