Equity Risk Factors for the Long and Short Run: Pricing and Performance at Different Frequencies

Terri van der Zwan, Erik Hennink and Patrick Tuijp
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Terri van der Zwan: Erasmus University Rotterdam
Erik Hennink: Ortec Finance

No 21-062/III, Tinbergen Institute Discussion Papers from Tinbergen Institute

Abstract: We find that the outperformance for Fama-French factors compared to macroeconomic factors in terms of fitting the cross-section of expected returns disappears when accounting for horizon effects. In addition, we obtain novel empirical relations between macroeconomic factors and Fama-French factors at longer horizons. To obtain our results, we introduce a general linear multifactor asset pricing methodology that integrates systematic risk measured at different frequencies into a single pricing equation. Our setup allows for a setting where investors with different investment horizons may experience different levels of systematic risk, which could arise from delayed stock price reaction to systematic factor news.

Keywords: Cross-Section of Stock Returns; Factors; Frequency Decomposition; Horizon Effects; Investment Horizon (search for similar items in EconPapers)
JEL-codes: C58 G11 G12 (search for similar items in EconPapers)
Date: 2021-07-04
New Economics Papers: this item is included in nep-cwa, nep-fmk and nep-rmg
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