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The Impact of Multiperiod Planning Horizons on Portfolios and Asset Prices

Author

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  • Marten Hillebrand

Abstract

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

Suggested Citation

  • Marten Hillebrand, 2004. "The Impact of Multiperiod Planning Horizons on Portfolios and Asset Prices," Computing in Economics and Finance 2004 259, Society for Computational Economics.
    • Handle: RePEc:sce:scecf4:259
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    Citations

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    Cited by:

    1. Ulrich Horst & Jan Wezelburger, 2006. "Non-ergodic Behavior in a Financial Market with Interacting Investors," 2006 Meeting Papers 229, Society for Economic Dynamics.
    2. Bohm, Volker & Wenzelburger, Jan, 2005. "On the performance of efficient portfolios," Journal of Economic Dynamics and Control, Elsevier, vol. 29(4), pages 721-740, April.
    3. Hillebrand, Marten & Wenzelburger, Jan, 2006. "On the dynamics of asset prices and portfolios in a multiperiod CAPM," Chaos, Solitons & Fractals, Elsevier, vol. 29(3), pages 578-594.

    More about this item

    Keywords

    Multiperiod portfolio decisions; CAPM; asset markets; asset pricing;
    All these keywords.

    JEL classification:

    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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