The Impact of Multiperiod Planning Horizons on Portfolios and Asset Prices
This paper studies a financial market in which heterogeneous investors with multiperiod planning horizons of arbitrary finite length interact dynamically. Assumptions on individual preferences and subjective expectations are provided under which asset demand functions and market clearing prices can be calculated explicitly. The existence of a perfect forecasting rule which generates rational expectations is established and the properties of the induced processes of prices and portfolios are analyzed. We show that different planning horizons lead to the formation of structurally distinct portfolios even if investors share the same beliefs about the future development of asset prices. We extend the capital market line result from classical CAPM to the case with multiperiod planning horizons by proving that under homogeneous beliefs, portfolios of investors facing the same planning horizon contain identical proportions of risky assets. Numerical evidence is provided that time series of prices and returns generated by investors with rational expectations exhibit strong volatility clustering. The presence of investors with different planning horizons may thus provide a natural source for clustered volatility in empirically observed financial data
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
When requesting a correction, please mention this item's handle: RePEc:sce:scecf4:259. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.