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
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|Date of creation:||11 Aug 2004|
|Date of revision:|
|Contact details of provider:|| Web page: http://comp-econ.org/|
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