IDEAS home Printed from https://ideas.repec.org/a/vrs/finprj/v2y2016i2p12-48n1005.html
   My bibliography  Save this article

The Time Diversification Puzzle: A Survey

Author

Listed:
  • Bianchi Robert J.
  • Drew Michael E.
  • Walk Adam N.

Abstract

Since Samuelson’s (1969) theoretical proof that risk and time are unrelated, a half century of debate and controversy has ensued, leaving time diversification as one of the most enduring puzzles of modern finance. The most conspicuous aspect of the debate is the questionable assumptions that underlie much of the analysis. Thus we are left with an unsatisfying debate conducted in a paradigm where terminal wealth is usually a function only of returns, and where time-weighted measures are assumed to adequately evaluate performance. This paper reviews the major streams in the time diversification literature and argues that more realistic analysis using defensible assumptions is likely to lead to better prescriptions for improved retirement investing.

Suggested Citation

  • Bianchi Robert J. & Drew Michael E. & Walk Adam N., 2016. "The Time Diversification Puzzle: A Survey," Financial Planning Research Journal, Sciendo, vol. 2(2), pages 12-48.
    • Handle: RePEc:vrs:finprj:v:2:y:2016:i:2:p:12-48:n:1005
    DOI: 10.2478/fprj-2016-0009
    as

    Download full text from publisher

    File URL: https://doi.org/10.2478/fprj-2016-0009
    Download Restriction: no
    File URL: https://libkey.io/10.2478/fprj-2016-0009?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Myung Jig Kim & Charles R. Nelson & Richard Startz, 1991. "Mean Reversion in Stock Prices? A Reappraisal of the Empirical Evidence," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(3), pages 515-528.
    2. Malliaropulos, Dimitrios & Priestley, Richard, 1999. "Mean reversion in Southeast Asian stock markets," Journal of Empirical Finance, Elsevier, vol. 6(4), pages 355-384, October.
    3. Craig Merrill & Steven Thorley, 1996. "Time Diversification: Perspectives from Option Pricing Theory," Financial Analysts Journal, Taylor & Francis Journals, vol. 52(3), pages 13-19, May.
    4. Anup K. Basu & Michael E. Drew, 2009. "The Case for Gender‐Sensitive Superannuation Plan Design," Australian Economic Review, The University of Melbourne, Melbourne Institute of Applied Economic and Social Research, vol. 42(2), pages 177-189, June.
    5. Diamond, William D, 1988. "The Effect of Probability and Consequence Levels on the Focus of Consumer Judgments in Risky Situations," Journal of Consumer Research, Journal of Consumer Research Inc., vol. 15(2), pages 280-283, September.
    6. Merton, Robert C. & Samuelson, Paul A., 1974. "Fallacy of the log-normal approximation to optimal portfolio decision-making over many periods," Journal of Financial Economics, Elsevier, vol. 1(1), pages 67-94, May.
    7. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-273, April.
    8. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
    9. Mike Dempsey & Robert Hudson & Kevin Littler & Kevin Keasey, 1996. "On the Risk of Stocks in the Long Run: A Resolution to the Debate?," Financial Analysts Journal, Taylor & Francis Journals, vol. 52(5), pages 57-62, September.
    10. Ľuboš Pástor & Robert F. Stambaugh, 2012. "Are Stocks Really Less Volatile in the Long Run?," Journal of Finance, American Finance Association, vol. 67(2), pages 431-478, April.
    11. Levhari, David & Levy, Haim, 1977. "The Capital Asset Pricing Model and the Investment Horizon," The Review of Economics and Statistics, MIT Press, vol. 59(1), pages 92-104, February.
    12. R. Douglas Van Eaton & James A. Conover, 1998. "Misconceptions about Optimal Equity Allocation and Investment Horizon," Financial Analysts Journal, Taylor & Francis Journals, vol. 54(2), pages 52-59, March.
    13. Bernd-O. Heine & Matthias Meyer & Oliver Strangfeld, 2005. "Stylised Facts and the Contribution of Simulation to the Economic Analysis of Budgeting," Journal of Artificial Societies and Social Simulation, Journal of Artificial Societies and Social Simulation, vol. 8(4), pages 1-4.
    14. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    15. Gollier, Christian, 2002. "Time diversification, liquidity constraints, and decreasing aversion to risk on wealth," Journal of Monetary Economics, Elsevier, vol. 49(7), pages 1439-1459, October.
    16. Richardson, Matthew & Stock, James H., 1989. "Drawing inferences from statistics based on multiyear asset returns," Journal of Financial Economics, Elsevier, vol. 25(2), pages 323-348, December.
    17. Thomas Howe & David Mistic, 2003. "Taxes, time diversification, and asset choice at retirement," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 27(3), pages 404-421, September.
    18. McQueen, Grant, 1992. "Long-Horizon Mean-Reverting Stock Prices Revisited," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 27(1), pages 1-18, March.
    19. Basu, Anup K. & Drew, Michael E., 2010. "The appropriateness of default investment options in defined contribution plans: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 18(3), pages 290-305, June.
    20. Robert A. Olsen, 1997. "Investment Risk: The Experts' Perspective," Financial Analysts Journal, Taylor & Francis Journals, vol. 53(2), pages 62-66, March.
    21. Hawawini, Gabriel & Vora, Ashok, 1981. "The capital asset pricing model and the investment horizon: Comment," MPRA Paper 44904, University Library of Munich, Germany.
    22. Matthew Rabin, 2000. "Risk Aversion and Expected-Utility Theory: A Calibration Theorem," Econometrica, Econometric Society, vol. 68(5), pages 1281-1292, September.
    23. Haim Levy, 1996. "Investment diversification and investment specialization and the assumed holding period," Applied Mathematical Finance, Taylor & Francis Journals, vol. 3(2), pages 117-134.
    24. Poterba, James M. & Summers, Lawrence H., 1988. "Mean reversion in stock prices : Evidence and Implications," Journal of Financial Economics, Elsevier, vol. 22(1), pages 27-59, October.
    25. Nelson, Charles R, 1976. "Inflation and Rates of Return on Common Stocks," Journal of Finance, American Finance Association, vol. 31(2), pages 471-483, May.
    26. Esther Ruiz & Lorenzo Pascual, 2002. "Bootstrapping Financial Time Series," Journal of Economic Surveys, Wiley Blackwell, vol. 16(3), pages 271-300, July.
    27. Ravi Jagannathan & Narayana R. Kocherlakota, 1996. "Why should older people invest less in stock than younger people?," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 20(Sum), pages 11-23.
    28. Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
    29. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-470, May.
    30. Lakshman Alles, 2008. "The cost of downside protection and the time diversification issue in South Asian stock markets," Applied Financial Economics, Taylor & Francis Journals, vol. 18(10), pages 835-843.
    31. Haim Levy, 1972. "Portfolio Performance and the Investment Horizon," Management Science, INFORMS, vol. 18(12), pages 645-653, August.
    32. De Bondt, Werner F M & Thaler, Richard H, 1987. "Further Evidence on Investor Overreaction and Stock Market Seasonalit y," Journal of Finance, American Finance Association, vol. 42(3), pages 557-581, July.
    33. Liang Zou, 1997. "Investments with Downside Insurance and the Issue of Time Diversification," Financial Analysts Journal, Taylor & Francis Journals, vol. 53(4), pages 73-79, July.
    34. Bawa, Vijay S., 1975. "Optimal rules for ordering uncertain prospects," Journal of Financial Economics, Elsevier, vol. 2(1), pages 95-121, March.
    35. Paolo Vanini & Luigi Vignola, 2002. "Optimal Decision-Making with Time Diversification," Review of Finance, European Finance Association, vol. 6(1), pages 1-30.
    36. Joao F. Cocco, 2005. "Consumption and Portfolio Choice over the Life Cycle," The Review of Financial Studies, Society for Financial Studies, vol. 18(2), pages 491-533.
    37. Kenneth L. Fisher & Meir Statman, 1999. "A Behavioral Framework for Time Diversification," Financial Analysts Journal, Taylor & Francis Journals, vol. 55(3), pages 88-97, May.
    38. Marshall, John F, 1994. "The Role of the Investment Horizon in Optimal Portfolio Sequencing (An Intuitive Demonstration in Discrete Time)," The Financial Review, Eastern Finance Association, vol. 29(4), pages 557-576, November.
    39. 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 247-257, August.
    40. Roll, Richard, 1971. "Investment Diversification and Bond Maturity," Journal of Finance, American Finance Association, vol. 26(1), pages 51-66, March.
    41. Hawanini, Gabriel A & Vora, Ashok, 1981. "The Capital Asset Pricing Model and the Investment Horizon: Comment," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 633-636, November.
    42. Bob Baldwin, 2008. "The Shift from DB to DC Coverage: A Reflection on the Issues," Canadian Public Policy, University of Toronto Press, vol. 34(s1), pages 29-38, November.
    43. Richard Taylor & Donald J. Brown, 1996. "On the Risk of Stocks in the Long Run: A Note," Financial Analysts Journal, Taylor & Francis Journals, vol. 52(2), pages 69-71, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Malliaropulos, Dimitrios, 1998. "International stock return differentials and real exchange rate changes," Journal of International Money and Finance, Elsevier, vol. 17(3), pages 493-511, June.
    2. Noor Ghazali & Shamshubariah Ramlee, 2003. "A long memory test of the long-run Fisher effect in the G7 countries," Applied Financial Economics, Taylor & Francis Journals, vol. 13(10), pages 763-769.
    3. Munk, Claus, 2020. "A mean-variance benchmark for household portfolios over the life cycle," Journal of Banking & Finance, Elsevier, vol. 116(C).
    4. Balvers, Ronald J. & Mitchell, Douglas W., 2000. "Efficient gradualism in intertemporal portfolios," Journal of Economic Dynamics and Control, Elsevier, vol. 24(1), pages 21-38, January.
    5. Klos, Alexander & Langer, Thomas & Weber, Martin, 2002. "Über kurz oder lang : welche Rolle spielt der Anlagehorizont bei Investitionsentscheidungen?," Papers 02-49, Sonderforschungsbreich 504.
    6. Spierdijk, Laura & Bikker, Jacob A. & van den Hoek, Pieter, 2012. "Mean reversion in international stock markets: An empirical analysis of the 20th century," Journal of International Money and Finance, Elsevier, vol. 31(2), pages 228-249.
    7. Guiso, Luigi & Sodini, Paolo, 2013. "Household Finance: An Emerging Field," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 1397-1532, Elsevier.
    8. James J. Choi, 2022. "Popular Personal Financial Advice versus the Professors," Journal of Economic Perspectives, American Economic Association, vol. 36(4), pages 167-192, Fall.
    9. Phoebe Koundouri & Nikolaos Kourogenis & Nikitas Pittis & Panagiotis Samartzis, 2016. "Factor Models of Stock Returns: GARCH Errors versus Time‐Varying Betas," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 35(5), pages 445-461, August.
    10. Gangopadhyay, Partha & Reinganum, Marc R., 1996. "Interpreting mean reversion in stock returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 36(3), pages 377-394.
    11. Kim, Hyeongwoo & Ryu, Deockhyun, 2015. "Measuring the speed of convergence of stock prices: A nonparametric and nonlinear approach," Economic Modelling, Elsevier, vol. 51(C), pages 227-241.
    12. Kim, Chang-Jin & Morley, James C. & Nelson, Charles R., 2001. "Does an intertemporal tradeoff between risk and return explain mean reversion in stock prices?," Journal of Empirical Finance, Elsevier, vol. 8(4), pages 403-426, September.
    13. James J. Choi & Adriana Z. Robertson, 2020. "What Matters to Individual Investors? Evidence from the Horse's Mouth," Journal of Finance, American Finance Association, vol. 75(4), pages 1965-2020, August.
    14. Zhou, Y., 2014. "Essays on habit formation and inflation hedging," Other publications TiSEM 4886da12-1b84-4fd9-aa07-3, Tilburg University, School of Economics and Management.
    15. Levy, Haim & Levy, Moshe, 2021. "Stocks versus bonds for the long run when a riskless asset is available," Journal of Banking & Finance, Elsevier, vol. 133(C).
    16. Chung, Kee H. & Smith, William T. & Wu, Tao L., 2009. "Time diversification: Definitions and some closed-form solutions," Journal of Banking & Finance, Elsevier, vol. 33(6), pages 1101-1111, June.
    17. John Y. Campbell & Yeung Lewis Chanb & M. Viceira, 2013. "A multivariate model of strategic asset allocation," World Scientific Book Chapters, in: Leonard C MacLean & William T Ziemba (ed.), HANDBOOK OF THE FUNDAMENTALS OF FINANCIAL DECISION MAKING Part II, chapter 39, pages 809-848, World Scientific Publishing Co. Pte. Ltd..
    18. J. Annaert & W. Van Hyfte, 2006. "Long-Horizon Mean Reversion for the Brussels Stock Exchange: Evidence for the 19th Century," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 06/376, Ghent University, Faculty of Economics and Business Administration.
    19. John Hatgioannides & Spiros Mesomeris, 2005. "Mean Reversion in Equity Prices: the G-7 Evidence," Money Macro and Finance (MMF) Research Group Conference 2005 64, Money Macro and Finance Research Group.
    20. Panagiotis Samartzis & Nikitas Pittis & Nikolaos Kourogenis & Phoebe Koundouri, "undated". "Factor Models of Stock Returns: GARCH Errors versus Autoregressive Betas," DEOS Working Papers 1318, Athens University of Economics and Business.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:vrs:finprj:v:2:y:2016:i:2:p:12-48:n:1005. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.sciendo.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.