Discounting Timing Strategies

Département: Finance

Intervenant: Toomas Laarits (NYU)

Salle: T117

Abstract

Prior work has documented a number of timing strategies that obtain superior Sharpe ratios and alphas relative to underlying buy-and-hold portfolios. I establish a
novel fact: the risk-return tradeoff of such strategies deteriorates substantially as the investment horizon lengthens, providing a rationale for the seemingly good returns.
The documented effect is large: multifactor alphas are more than halved going from a one-month to a 10-year horizon, emphasizing the importance of establishing portflio
performance at different horizons. I show that such return dynamics arise in an equilibrium model with seasonalities in the volatility of price of risk and expected cash-flowshocks and present a connection with the pricing of dividend strips.