Conditional Dynamics and the Multi-Horizon Risk-Return Trade-Off

Chernov, Mikhail; Lochstoer, Lars A.; Lundeby, Stig R. H.

doi:10.3386/w25361

Cited by 13 publications

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“…We use upper bounds on the unconditional variance to derive restrictions on the impact of conditioning information. Chernov et al (2018) propose testing asset-pricing models using multi-horizon returns and find that many standard empirical models of the SDF are rejected, exactly because they lack time-variation in how the SDF loads on the factors. Moreira and Muir (2017) document benefits to volatility timing, implying changes in volatility play a meaningful role in the heteroskedasticity of the SDF.…”

Section: Related Literaturementioning

confidence: 99%

Factor Timing

Haddad¹,

Kozak²,

Santosh³

2020

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Section: Related Literaturementioning

confidence: 99%

Factor Timing

Haddad¹,

Kozak²,

Santosh³

2020

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“… Moreover, Haddad, Kozak, and Santosh (2020) andGiglio, Kelly, and Kozak (2020) stress that timevariation in risk prices is a critical property of the stochastic discount factor and equity term structure dynamics. Consistently,Chernov, Lochstoer, and Lundeby (2018) andFavero, Ortu, Tamoni, and Yang (2019) emphasize the importance of time-variation in risk prices by implementing tests of asset-pricing models exploiting multi-horizon returns and their predictability.…”

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confidence: 99%

Corporate Policies and the Term Structure of Risk

2020

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We build a dynamic corporate finance model with heterogeneity in the pricing and in the firm's exposure to aggregate risks of various persistence. All else equal, we show that if long-term (persistent) shocks have a higher market price than shortterm (temporary) shocks, firms shorten the horizon of corporate policies, favoring payouts over investment. In the cross section, this effect is stronger for firms more exposed to long-term shocks, but can be reversed for firms more exposed to shortterm shocks. Our analysis is extended to embed time variation in risk prices over the business cycle, motivated by recent evidence on the term structure of equity.

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Factor Timing

Haddad

Kozak

Santosh

2020

The Review of Financial Studies

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The optimal factor timing portfolio is equivalent to the stochastic discount factor. We propose and implement a method to characterize both empirically. Our approach imposes restrictions on the dynamics of expected returns, leading to an economically plausible SDF. Market-neutral equity factors are strongly and robustly predictable. Exploiting this predictability leads to substantial improvement in portfolio performance relative to static factor investing. The variance of the corresponding SDF is larger, is more variable over time, and exhibits different cyclical behavior than estimates ignoring this fact. These results pose new challenges for theories that aim to match the cross-section of stock returns. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

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Conditional Dynamics and the Multi-Horizon Risk-Return Trade-Off

Cited by 13 publications

References 0 publications

Factor Timing

Factor Timing

Corporate Policies and the Term Structure of Risk

Factor Timing

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