Asset Pricing Implications of Heterogeneous Investment Horizons

55 Pages Posted: 25 May 2021 Last revised: 17 Nov 2022

See all articles by Idan Hodor

Idan Hodor

Monash University

Fernando Zapatero

Questrom School of Business, Boston University

Date Written: November 10, 2022

Abstract

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. We show that these two asset management frictions, primarily through their interaction, can explain why the risk premium, volatility, and Sharpe ratio on short-term dividend strips are higher than on long-term dividend strips --- predictions that leading equilibrium asset pricing models cannot generate. Our theory rationalizes the empirical findings on unconditional and conditional downward sloping risk premiums. We provide novel empirical evidence to further support the mechanism, which is set in continuous time, and admits closed-form expressions.

Keywords: Performance Window, Short-term Investment Horizon, Heterogeneous Agents, Asset Management, Benchmarking

JEL Classification: G12, G23

Suggested Citation

Hodor, Idan and Zapatero, Fernando, Asset Pricing Implications of Heterogeneous Investment Horizons (November 10, 2022). Available at SSRN: https://ssrn.com/abstract=3852487 or http://dx.doi.org/10.2139/ssrn.3852487

Idan Hodor (Contact Author)

Monash University ( email )

900 Dandenong Road
Caulfield East, Victoria 3145
Australia

Fernando Zapatero

Questrom School of Business, Boston University ( email )

595 Commonwealth Avenue
Boston, MA 02215
United States
617-353-3631 (Phone)

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