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The investment horizon and asset pricing models

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  • Kathleen Walsh

Abstract

The Life Cycle Hypothesis suggests that the primary motivation for saving is to accumulate resources in order to fund retirement. This suggests that investors have heterogeneous investment horizons, yet many tests of the CAPM assume homogeneous horizons. This paper estimates a time varying heterogeneous investment horizon using over 200 years of demographic data. We test the CAPM and its assumption that the Equity Risk Premium is positive using our estimated investment horizon. We conclude that the CAPM is not violated when tested over a horizon that more accurately reflects investor behavior.

Suggested Citation

  • Kathleen Walsh, 2015. "The investment horizon and asset pricing models," Australian Journal of Management, Australian School of Business, vol. 40(2), pages 277-294, May.
    • Handle: RePEc:sae:ausman:v:40:y:2015:i:2:p:277-294
    DOI: 10.1177/0312896214521439
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    Cited by:

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    2. Yushu Zhu, 2017. "Call it good, bad or no news? The valuation effect of debt issues," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 57(4), pages 1203-1229, December.

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    More about this item

    Keywords

    CAPM; Equity Risk Premium; investment horizon: demographic data;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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