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Horizon effect in the term structure of long-run risk-return trade-offs

Listed author(s):
  • Okou, Cédric
  • Jacquier, Éric
Registered author(s):

    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 flat, that is, the risk-return slope coefficients are equal across horizons. When the regression model includes an intercept, the premise of a flat term structure of risk-return relationships is rejected. In contrast, there is no significant statistical evidence against the equality of slope coefficients 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.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0167947314002084
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    Article provided by Elsevier in its journal Computational Statistics & Data Analysis.

    Volume (Year): 100 (2016)
    Issue (Month): C ()
    Pages: 445-466

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    Handle: RePEc:eee:csdana:v:100:y:2016:i:c:p:445-466
    DOI: 10.1016/j.csda.2014.07.004
    Contact details of provider: Web page: http://www.elsevier.com/locate/csda

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