Abstract
We characterize linkages between average returns calculated at different horizons. Theoretically, when stocks incorporate information slowly, average short-horizon returns are downward biased. Buy-and-hold strategies can amplify the effect. In contrast, existing theories analyze price noises that are independent of fundamentals, and buy-and-hold portfolio returns are unaffected. We document horizon effects as large as 10% annualized in daily and monthly style portfolios and international indices. Slow reaction to market information, identified by gradually declining lagged betas, is an important cause. These findings have natural consequences for performance evaluation.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 2241-2281 |
| Number of pages | 41 |
| Journal | Review of Financial Studies |
| Volume | 29 |
| Issue number | 8 |
| DOIs | |
| State | Published - Aug 1 2016 |
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ASJC Scopus subject areas
- Accounting
- Finance
- Economics and Econometrics
Cite this
Horizon effects in average returns : The role of slow information diffusion. / Boguth, Oliver; Carlson, Murray; Fisher, Adlai; Simutin, Mikhail.
In: Review of Financial Studies, Vol. 29, No. 8, 01.08.2016, p. 2241-2281.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Horizon effects in average returns
T2 - The role of slow information diffusion
AU - Boguth, Oliver
AU - Carlson, Murray
AU - Fisher, Adlai
AU - Simutin, Mikhail
PY - 2016/8/1
Y1 - 2016/8/1
N2 - We characterize linkages between average returns calculated at different horizons. Theoretically, when stocks incorporate information slowly, average short-horizon returns are downward biased. Buy-and-hold strategies can amplify the effect. In contrast, existing theories analyze price noises that are independent of fundamentals, and buy-and-hold portfolio returns are unaffected. We document horizon effects as large as 10% annualized in daily and monthly style portfolios and international indices. Slow reaction to market information, identified by gradually declining lagged betas, is an important cause. These findings have natural consequences for performance evaluation.
AB - We characterize linkages between average returns calculated at different horizons. Theoretically, when stocks incorporate information slowly, average short-horizon returns are downward biased. Buy-and-hold strategies can amplify the effect. In contrast, existing theories analyze price noises that are independent of fundamentals, and buy-and-hold portfolio returns are unaffected. We document horizon effects as large as 10% annualized in daily and monthly style portfolios and international indices. Slow reaction to market information, identified by gradually declining lagged betas, is an important cause. These findings have natural consequences for performance evaluation.
UR - http://www.scopus.com/inward/record.url?scp=84982284199&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=84982284199&partnerID=8YFLogxK
U2 - 10.1093/rfs/hhw024
DO - 10.1093/rfs/hhw024
M3 - Article
VL - 29
SP - 2241
EP - 2281
JO - Review of Financial Studies
JF - Review of Financial Studies
SN - 0893-9454
IS - 8
ER -