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Temporal aggregation and risk–return relation
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Jin, Xing, Wang, Leping and Yu, Jun (2007) Temporal aggregation and risk–return relation. Finance Research Letters , Volume 4 (Number 2). pp. 104-115. doi:10.1016/j.frl.2007.01.001 ISSN 1544-6123.
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Official URL: http://dx.doi.org/10.1016/j.frl.2007.01.001
Abstract
The function form of a linear intertemporal relation between risk and return is suggested by Merton's [1973. Econometrica 41, 867–887] analytical work for instantaneous returns, whereas empirical studies have examined the nature of this relation using temporally aggregated data, i.e., daily, monthly, quarterly, or even yearly returns. Our paper carefully examines the temporal aggregation effect on the validity of the linear specification of the risk–return relation at discrete horizons, and on its implications on the reliability of the resulting inference about the risk–return relation based on different observation intervals. Surprisingly, we show that, based on the standard Heston's [1993. Review of Financial Studies 6, 327–343] dynamics, the linear relation between risk and return will not be distorted by the temporal aggregation at all. Neither will the sign of this relation be flipped by the temporal aggregation, even at the yearly horizon. This finding excludes the temporal aggregation issue as a potential source for the conflicting empirical evidence about the risk–return relation in the earlier studies.
Item Type: | Journal Article | ||||||||||
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Subjects: | H Social Sciences > HG Finance | ||||||||||
Divisions: | Faculty of Social Sciences > Warwick Business School > Innovation, Knowledge & Organisational Networks Research Unit Faculty of Social Sciences > Warwick Business School |
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Library of Congress Subject Headings (LCSH): | Capital assets pricing model, Stocks--Prices, Investments--Mathematical models | ||||||||||
Journal or Publication Title: | Finance Research Letters | ||||||||||
Publisher: | Academic Press | ||||||||||
ISSN: | 1544-6123 | ||||||||||
Official Date: | June 2007 | ||||||||||
Dates: |
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Volume: | Volume 4 | ||||||||||
Number: | Number 2 | ||||||||||
Number of Pages: | 11 | ||||||||||
Page Range: | pp. 104-115 | ||||||||||
DOI: | 10.1016/j.frl.2007.01.001 | ||||||||||
Status: | Peer Reviewed | ||||||||||
Publication Status: | Published | ||||||||||
Access rights to Published version: | Restricted or Subscription Access | ||||||||||
Funder: | Singapore Management University |
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