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Investment Horizon Effects


  • He is grateful for comments from an anonymous referee and Peter F. Pope (the editor), as well as from Gonzalo Rubio, Roberto Blanco and participants at the SIRIF Conference on Dynamic Portfolio Strategies and IX Foro de Finanzas. Financial support from Spanish Ministry of Science and Technology, grant SEJ2004-01688/ECON, is also acknowledged.

†Javier Gil-Bazo, Universidad Carlos III de Madrid, calle Madrid 126, 28903 Getafe, Madrid, Spain.


Abstract: 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.