60 Pages Posted: 25 Nov 2015 Last revised: 11 Apr 2017
Date Written: March 27, 2017
We develop an overlapping generations model in which investors differ in their investment horizons. In equilibrium, the intertemporal hedging demand of longer horizon investors leads to a two-factor capital asset pricing model (CAPM) in which risk premiums are determined by both the market (myopic) beta and the “non-myopic beta” with respect to the future return on the mean-variance efficient portfolio. We use equilibrium equations to identify the efficient portfolio non-parametrically and show that non-myopic betas are indeed priced in the cross- section of stock returns, and the relationship between expected returns and non-myopic betas is monotone increasing and economically significant. In the presence of funding constraints, our model also predicts that low non-myopic beta stocks deliver higher risk-adjusted returns. We confirm this prediction by constructing a “betting against non-myopic beta” factor and showing that it generates superior performance over and above a number of factor models and is negatively correlated with the standard “betting against beta” portfolio.
Keywords: Asset prices, beta, CAPM, hedging, asset allocation, portfolio management, mutual funds
JEL Classification: G01, G11, G12, G14, G15
Suggested Citation: Suggested Citation