Short-Horizon Beta or Long-Horizon Alpha?

Abstract

The authors study whether the pricing of systematic factors depends on the investment horizon over which risk is measured. Market beta and Fama--French value beta are priced when risk is measured over intermediate horizons, while liquidity beta is priced over short horizons. Alpha on a long-short portfolio formed on short-horizon liquidity beta increases monotonically as an investor's horizon, for measuring risk, increases, making those assets more attractive to long-horizon investors. Institutional investors align their portfolios to harvest risk premiums that are important to investors with different horizons than their own.

Keywords: Investor Horizon, Investor Clientele, Asset Pricing Model, Risk Factors

JEL Classification: G1, G11, G12