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Title: Horizon Effect in the Term Structure of Long-Run Risk-Return Trade-Offs
Authors: Okou, Cédric
Jacquier, Éric
Issue Date: 2014-07
Publisher: Centre interuniversitaire de recherche en analyse des organisations (CIRANO)
Series/Report no.: Série scientifique (CIRANO);2014s-36
Scientific series (CIRANO);2014s-36
Abstract: The horizon effect in the long-run predictive relationship between market excess return and historical market variance is investigated. To this end, the asymptotic multivariate distribution of the term structure of risk-return trade-offs is derived, accounting for short- and long-memory in the market variance dynamics. A rescaled Wald statistic is used to test whether the term structure of risk-return trade-offs is at, that is, the risk-return slope coeffcients are equal across horizons. When the regression model includes an intercept, the premise of a at term structure of risk-return relationships is rejected. In contrast, there is no significant statistical evidence against the equality of slope coeffcients from constrained risk-return regressions estimated at different horizons. A smoothed cross-horizon estimate is then proposed for the trade-off intensity at the market level. The findings underscore the importance of economically motivated restrictions to improve the estimation of intertemporal asset pricing models.
ISSN: 1198-8177
Appears in Collections:Cahiers scientifiques

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