Horizon Bias and the Term Structure of Equity Returns

49 Pages Posted: 14 Feb 2019 Last revised: 4 Jan 2021

See all articles by Stefano Cassella

Stefano Cassella

Tilburg University- School of Economics and Management

Benjamin Golez

University of Notre Dame

Huseyin Gulen

Purdue University - Krannert School of Management

Peter Kelly

University of Notre Dame

Date Written: January 2, 2021

Abstract

Recent work shows that the term structure of optimism has significant time-series variation and is, on average, upward sloping (horizon bias). We examine whether the horizon bias can explain the time-series variation in the equity term structure. We use analyst earnings forecasts to measure the degree of the horizon bias in the stock market. Consistent with the intuition from a stylized present value model, we find that periods of above-average horizon bias are associated with negative term premia, whereas periods of below-average horizon bias are associated with positive term premia. Furthermore, the horizon bias negatively predicts realized equity term premia.

Keywords: term structure of equities, extrapolation, optimism bias

Suggested Citation

Cassella, Stefano and Golez, Benjamin and Gulen, Huseyin and Kelly, Peter, Horizon Bias and the Term Structure of Equity Returns (January 2, 2021). Available at SSRN: https://ssrn.com/abstract=3328970 or http://dx.doi.org/10.2139/ssrn.3328970

Stefano Cassella

Tilburg University- School of Economics and Management ( email )

Professor de Moorplein 521
Tilburg, 5037
Netherlands

Benjamin Golez

University of Notre Dame ( email )

256 Mendoza College of Business
Notre Dame, IN 46556-5646
United States
(574) 631-1458 (Phone)

HOME PAGE: http://business.nd.edu/BenGolez/

Huseyin Gulen

Purdue University - Krannert School of Management ( email )

1310 Krannert Building
West Lafayette, IN 47907-1310
United States

Peter Kelly (Contact Author)

University of Notre Dame ( email )

251 Mendoza
South Bend, IN 46637
United States

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