Optimal Investment Horizons

5 Pages Posted: 1 Mar 2002

See all articles by Ingve Simonsen

Ingve Simonsen

Nordita

Anders Johansen

Riso National Laboratory - Wind Energy Department; University of Copenhagen, Niels Bohr. Inst.; University of California, Los Angeles (UCLA) - Institute of Geophysics and Planetary Physics

Mogens H. Jensen

Niels Bohr Institute

Date Written: February 21, 2002

Abstract

In stochastic finance, one traditionally considers the return as a competitive measure of an asset, i.e., the profit generated by that asset after some fixed time span, say one week or one year. This measures how well (or how bad) the asset performs over that given period of time. It has been established that the distribution of returns exhibits "fat tails" indicating that large returns occur more frequently than what is expected from standard Gaussian stochastic processes [1, 2, 3]. Instead of estimating this "fat tail" distribution of returns, we propose here an alternative approach, which is outlined by addressing the following question: What is the smallest time interval needed for an asset to cross a fixed return level of say 10%? For a particular asset, we refer to this time as the investment horizon and the corresponding distribution as the investment horizon distribution. This latter distribution complements that of returns and provides new and possibly crucial information for portfolio design and risk-management, as well as for pricing of more exotic options. By considering historical financial data, exemplified by the Dow Jones Industrial Average, we obtain a novel set of probability distributions for the investment horizons which can be used to estimate the optimal investment horizon for a stock or a future contract.

Suggested Citation

Simonsen, Ingve and Johansen, Anders and Jensen, Mogens H., Optimal Investment Horizons (February 21, 2002). Available at SSRN: https://ssrn.com/abstract=301719 or http://dx.doi.org/10.2139/ssrn.301719

Ingve Simonsen (Contact Author)

Nordita ( email )

Blegdamsvej 17
DK-2100 Copenhagen
Denmark

Anders Johansen

Riso National Laboratory - Wind Energy Department ( email )

Frederiksborgvej 399 Build. 118
P.O. 49
DK-4000 Roskilde
Denmark
+45 4677 5004 (Phone)
+45 4677 5083 (Fax)

HOME PAGE: http://www.risoe.dk/vea/staff/andj/

University of Copenhagen, Niels Bohr. Inst. ( email )

Blegdamsvej 17
DK-2100 Copenhagen
Denmark

University of California, Los Angeles (UCLA) - Institute of Geophysics and Planetary Physics ( email )

Box 951567
Los Angeles, CA 90095-1567
United States
(310) 825 0961 (Phone)
(310) 206 3051 (Fax)

Mogens H. Jensen

Niels Bohr Institute ( email )

Blegdamsvej 17
2100 Kbh.O
Denmark

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