Conditional dynamics and the multi-horizon risk-return trade-off

Mikhail Chernov, Lars Lochstoer and Stig Lundeby

No 13365, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We propose testing asset-pricing models using multi-horizon returns (MHR). MHR effectively generate a new set of test assets that are endogenous to the model and that identify a broad set of possible conditional misspecifications. We apply MHR-based testing to prominent linear factor models and show that these models typically do a poor job of pricing longer-horizon returns, with pricing errors of similar magnitude as the risk premiums they were designed to explain. We trace the errors to the conditional factor dynamics. Explicitly incorporating factor timing in the models often makes mispricing worse, posing a challenge for future research.

Keywords: Multi-horizon returns; Stochastic discount factor; Linear factor models (search for similar items in EconPapers)
JEL-codes: C51 G12 (search for similar items in EconPapers)
Date: 2018-12
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Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Conditional Dynamics and the Multihorizon Risk-Return Trade-Off (2022)
Working Paper: Conditional Dynamics and the Multi-Horizon Risk-Return Trade-Off (2018)
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