Asset Pricing Implications of Heterogeneous Investment Horizons

58 Pages Posted: 25 May 2021 Last revised: 10 Nov 2023

See all articles by Idan Hodor

Idan Hodor

Monash University

Fernando Zapatero

Boston University - Questrom School of Business

Date Written: November 10, 2023

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. 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

Hodor, Idan and Zapatero, Fernando, Asset Pricing Implications of Heterogeneous Investment Horizons (November 10, 2023). 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

Boston University - Questrom School of Business ( email )

595 Commonwealth Avenue
Boston, MA MA 02215
United States

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