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Assets returns volatility and investment horizon: The French case

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Author Info
Frédérique Bec () (THEMA, Université de Cergy-Pontoise et CREST, Malakoff, France.)
Christian Gollier () (Toulouse School of Economics (LERNA and IDEI), France.)

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Abstract

This paper explores French assets returns predictability within a VAR setup. Using quarterly data from 1970Q4 to 2006Q4, it turns out that bonds, equities and bills returns are actually predictable. This feature implies that the investment horizon does indeed matter in the asset allocation. The VAR parameters estimates are then used to compute real returns conditional volatility across investment horizons. The results reveal the same kind of horizon effect as the one found in recent empirical studies using quarterly U.S. data. More specifically, the annualized standard deviation of French stocks returns goes down from 22% for a 1-year horizon to only 2.8% for a 25-year investment horizon. They suggest that long-horizon investors overstate the share of bonds in their portfolio choice when neglecting the horizon effect on risk of asset returns predictability.

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Paper provided by THEMA (THéorie Economique, Modélisation et Applications), Université de Cergy-Pontoise in its series THEMA Working Papers with number 2008-10.

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Date of creation: 2008
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Handle: RePEc:ema:worpap:2008-10

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Related research
Keywords: Asset return predictability; Investment horizon; Vector Autoregression.;

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Nicholas Barberis, 2000. "Investing for the Long Run when Returns Are Predictable," Journal of Finance, American Finance Association, vol. 55(1), pages 225-264, 02. [Downloadable!] (restricted)
  2. Hansen, Bruce E, 1996. "Inference When a Nuisance Parameter Is Not Identified under the Null Hypothesis," Econometrica, Econometric Society, vol. 64(2), pages 413-30, March. [Downloadable!] (restricted)
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  3. Campbell, John Y. & Chan, Yeung Lewis & Viceira, Luis M., 2003. "A multivariate model of strategic asset allocation," Journal of Financial Economics, Elsevier, vol. 67(1), pages 41-80, January. [Downloadable!] (restricted)
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  4. Samuelson, Paul A, 1969. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 239-46, August. [Downloadable!] (restricted)
  5. Fama, Eugene F. & French, Kenneth R., 1988. "Dividend yields and expected stock returns," Journal of Financial Economics, Elsevier, vol. 22(1), pages 3-25, October. [Downloadable!] (restricted)
  6. Campbell, John Y, 1991. "A Variance Decomposition for Stock Returns," Economic Journal, Royal Economic Society, vol. 101(405), pages 157-79, March. [Downloadable!] (restricted)
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  7. Bai, Jushan & Lumsdaine, Robin L & Stock, James H, 1998. "Testing for and Dating Common Breaks in Multivariate Time Series," Review of Economic Studies, Blackwell Publishing, vol. 65(3), pages 395-432, July. [Downloadable!] (restricted)
  8. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August. [Downloadable!] (restricted)
  9. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-56, July. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Gollier, Christian, 2007. "Assets Relative Risk for Long-term Investors," IDEI Working Papers 466, Institut d'Économie Industrielle (IDEI), Toulouse. [Downloadable!]
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