Investment Horizon Effects

:  Boudry and Gray (2003) have documented that the optimal buy‐and‐hold demand for Australian stocks is not necessarily increasing in the investment horizon when returns are predictable. Such finding is in contrast with Barberis (2000) who shows that positive monotonic horizon effects predominate fo...

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Bibliographic Details
Published in:Journal of business finance & accounting 2006-01, Vol.33 (1-2), p.179-202
Main Author: Gil-Bazo, Javier
Format: Article
Language:English
Subjects:
Asset allocation
Asset valuation
Financial management
Financial research
Impact analysis
investment horizon effects
Investment policy
Investment returns
portfolio choice
Predictions
Rates of return
return predictability
Risk exposure
Stock exchange
Stock prices
Studies
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Summary::  Boudry and Gray (2003) have documented that the optimal buy‐and‐hold demand for Australian stocks is not necessarily increasing in the investment horizon when returns are predictable. Such finding is in contrast with Barberis (2000) who shows that positive monotonic horizon effects predominate for US stocks. Using a closed‐form approximation to the asset allocation problem, this paper relates the return dynamics to the investor's portfolio choice for different investment horizons. In the special case of a single risky asset, it is shown that return predictability under stationarity may induce both positive and negative horizon effects in the optimal allocation to the risky asset. The paper extends previous empirical results by solving for the optimal portfolio when two risky assets with predictable returns are available for investment.
ISSN:0306-686X
1468-5957
DOI:10.1111/j.1468-5957.2006.01098.x