Holding Period Return-Risk Modeling: Ambiguity in Estimation

22 Pages Posted: 15 Oct 2003

See all articles by Winfried G. Hallerbach

Winfried G. Hallerbach

Robeco Asset Management, Quantitative Investment Research

Date Written: 25 2003 9,


In this paper we explore the theoretical and empirical problems of estimating average(excess) return and risk of US equities over various holding periods and sampleperiods. Our findings are relevant for performance evaluation, for estimating thehistorical equity risk premium, and for investment simulation.Using a unique set of US equity data series, comprising monthly prices anddividends based on consistent definitions over the 132 year period 1871-2002, weinvestigate the complex effect of temporal return aggregation and sample estimationerror. Our major finding is that holding period risk and return statistics show anextraordinary sensitivity to the choice of the starting point in calendar time. Forexample, over the period 1926-2002 there is a difference of almost 140 basis pointsbetween the average annual total return starting in January compared to starting inJuly, and a difference of almost 7 (!) percentage points in estimated annual volatility.This is yet another way in which stock price seasonality manifests itself, but thisambiguity in the underlying estimation process seems completely neglected in thecurrent literature.

Keywords: holding period return, equity risk premium, temporal aggregation, stock price seasonality

JEL Classification: M, G3, C13, C22, C89, G14

Suggested Citation

Hallerbach, Winfried George, Holding Period Return-Risk Modeling: Ambiguity in Estimation (25 2003 9,). ERIM Report Series Reference No. ERS-2003-063-F&A, Available at SSRN: https://ssrn.com/abstract=450995

Winfried George Hallerbach (Contact Author)

Robeco Asset Management, Quantitative Investment Research ( email )

Weena 850
Rotterdam, 3014 DA
+31102242316 (Phone)

HOME PAGE: http://www.robeco.com/quant

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