Article2016

Horizon Pricing

Avraham Kamara · Robert A. Korajczyk · Xiaoxia Lou · Ronnie Sadka

95 citations0/0 files storedJournal of Financial and Quantitative Analysis

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Financial Markets and Investment Strategies Financial Analysis and Corporate Governance Financial Risk and Volatility Modeling

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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References

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