Asset Pricing Implications of Heterogeneous Investment Horizons
58 Pages Posted: 25 May 2021 Last revised: 10 Nov 2023
Date Written: November 10, 2023
Short performance windows shrink mutual fund managers' investment horizons well below value investors' long-term investment mandates, and relative performance evaluations introduce benchmarking incentives among mutual fund managers' objectives. These two asset management frictions, primarily through their interaction, may explain the differences between risk premiums, volatilities, and Sharpe ratios of short-term and long-term equity duration assets, predictions unaffected by passive investment mandate. The analysis shows that risk appetite and the strength of benchmarking incentives determine the trends in risk premiums and volatilities, and answers why long-term prices positively correlate with short-term news beyond the correlation between short-term and long-term payouts.
Keywords: Performance Window, Short-term Investment Horizon, Heterogeneous Agents, Asset Management, Benchmarking
JEL Classification: G12, G23, D53
Suggested Citation: Suggested Citation