NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Stig Lundeby

Norwegian School of Economics (NHH)
Helleveien 30
Bergen
Norway

E-Mail: stig.lundeby@nhh.no
Institutional Affiliation: Norwegian School of Economics

NBER Working Papers and Publications

December 2018Conditional Dynamics and the Multi-Horizon Risk-Return Trade-Off
with Mikhail Chernov, Lars A. Lochstoer: w25361
We propose testing asset-pricing models using multi-horizon returns (MHR). MHR serve as powerful source of conditional information that is economically important and not data-mined. We apply MHR-based testing to linear factor models. These models seek to construct the unconditionally mean-variance efficient portfolio. We reject all state-of-the-art models that imply high maximum Sharpe ratios in a single-horizon setting. Thus, the models do a poor job in accounting for the risk-return trade-off at longer horizons. Across the different models, the mean absolute pricing errors associated with MHR are positively related to the magnitude of maximal Sharpe ratio in the single-horizon setting. Model misspecification manifests itself in strong intertemporal dynamics of the factor loadings in the ...
 
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