The Effect of Serial Dependence on Multiperiod Holding Period Return Performance

Authors


* Corresponding author: Department of Finance and Real Estate, Colorado State University, Fort Collins, CO 80523; Phone: (970) 491-5547; Fax: (970) 491-7665; E-mail: robert.schwebach@colostate.edu

Abstract

The impact of the investment time horizon on risk-return properties of asset returns depends on the presence of serial correlation and higher order serial dependencies. We present a methodology for decomposing multiperiod holding period return covariance into serial and cross-sectional components using a recursive multiplicative model that captures the effects of serial and cross-sectional dependencies and their joint effects without requiring a distributional form assumption. Applying this model to historical monthly return series for commonly held financial assets and portfolios of assets, we investigate the significance of the investment time horizon, the existence and relevance of time diversification, the inflation-hedging effectiveness of different assets, and the appropriateness of applying traditional capital market theory in a multiperiod framework.

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