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Horizon Pricing

Published online by Cambridge University Press:  29 December 2016

Avraham Kamara ,
Robert A. Korajczyk ,
Xiaoxia Lou  and
Ronnie Sadka
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Abstract

The literature documents heterogeneity in the delay of stock price reaction to systematic shocks, implying that asset risk depends on investment horizon. We study the pricing of risk factors across investment horizons. Value (liquidity) risk is priced over intermediate (short) horizons. Conditioning horizon-factor exposures on firm characteristics indicates that characteristics, with the exception of momentum, are not priced beyond their contribution to systematic risk. Long-horizon institutional investors overweight assets with high intermediate-horizon exposures to value risk and high short-horizon exposures to liquidity risk. The results highlight the importance of investment horizon in determining risk premia.

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Type
Research Article
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Journal of Financial and Quantitative Analysis , Volume 51 , Issue 6 , December 2016 , pp. 1769 - 1793
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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