Conditional Dynamics and the Multi-Horizon Risk-Return Trade-Off

37 Pages Posted: 24 Dec 2018 Last revised: 3 May 2019

See all articles by Mikhail Chernov

Mikhail Chernov

UCLA Anderson

Lars A. Lochstoer

University of California, Los Angeles (UCLA) - Anderson School of Management

Stig H.R. Lundeby

Norwegian School of Economics (NHH)

Multiple version iconThere are 3 versions of this paper

Date Written: April 30, 2019

Abstract

We propose testing asset-pricing models using multi-horizon returns (MHR). MHR serve as powerful source of conditional information that is economically important and not data-mined. We apply MHR-based testing to linear factor models. These models seek to construct the unconditionally mean-variance efficient portfolio. We reject many popular models that deliver high maximum Sharpe ratios in a single-horizon setting, due to persistent specification errors that manifest in large pricing errors for longer-horizon returns. MHR reveal that strong intertemporal dynamics of the factor loadings in the SDF representation is needed to account for the cross-section of returns jointly across multiple horizons.

Keywords: multi-horizon returns, linear factor models, stochastic discount factor

JEL Classification: G12, C51

Suggested Citation

Chernov, Mikhail and Lochstoer, Lars A. and Lundeby, Stig, Conditional Dynamics and the Multi-Horizon Risk-Return Trade-Off (April 30, 2019). Available at SSRN: https://ssrn.com/abstract=3296130 or http://dx.doi.org/10.2139/ssrn.3296130

Mikhail Chernov

UCLA Anderson ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Lars A. Lochstoer (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Stig Lundeby

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

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