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3 edition of Why is long-horizon [equity] less risky? found in the catalog.

Why is long-horizon [equity] less risky?

Martin Lettau

Why is long-horizon [equity] less risky?

a duration-based explanation of the value premium

by Martin Lettau

  • 262 Want to read
  • 12 Currently reading

Published by National Bureau of Economic Research in Cambridge, Mass .
Written in English

    Subjects:
  • Stocks -- Mathematical models,
  • Rate of return -- Mathematical models,
  • Corporations -- Valuation -- Mathematical models,
  • Risk -- Mathematical models,
  • Investments -- Mathematical models

  • Edition Notes

    Other titlesWhy is long-horizon less risky.
    StatementMartin Lettau, Jessica Wachter.
    SeriesNBER working paper series -- working paper 11144., Working paper series (National Bureau of Economic Research) -- working paper no. 11144.
    ContributionsWachter, Jessica., National Bureau of Economic Research.
    The Physical Object
    Pagination37, [22] p. :
    Number of Pages37
    ID Numbers
    Open LibraryOL17626042M
    OCLC/WorldCa58533243

    What the equity risk premium tells us today. The equity risk premium tells us much about risks/returns amid the debt crisis. Jason Voss analyses the equity risk premium, a metric that helps. Private equity investing has created enormous wealth for those fortunate to be the general partners of a fund. But for regular investors – the limited partners – recent studies show that when properly adjusted for risks PE returns lag those of the less risky public markets. Moreover, there is little evidence that investors can identify, in advance, the very few PE funds that will outperform. The Efficient Market Hypothesis suggests that investors cannot earn excess risk-adjusted rewards. The variability of the stock price is thus reflected in the expected returns as returns and risk are positively correlated. 7. The following effects seem to suggest predictability within equity markets and thus disprove the Efficient Market Hypothesis. The left-hand side in our regressions is the long horizon return. Our long horizon return is the total market equity return in excess of the risk free rate realized in year one through year s. It is computed by compounding gross monthly returns for the appropriate number of years: (6) R t + 1, t + s = ∏ j = 1, 12 × s R t + j e − ∏ j = 1 Cited by:


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Why is long-horizon [equity] less risky? by Martin Lettau Download PDF EPUB FB2

Why Is Long-Horizon Equity Less Risky. A Duration-Based Explanation of the Value Premium MARTIN LETTAU and JESSICA A. WACHTER∗ ABSTRACT We propose a dynamic risk-based model that captures the value premium.

Firms are modeled as long-lived assets distinguished by the timing of cash flows. The stochastic. In summary, this section shows that setting ρ dx to zero, in combination with the duration effect and the correlation between current and future dividend growth, makes long‐horizon equity less risky than short‐horizon equity.

It creates a large premium on value stocks, while at the same time limiting their covariance with the by: Why Is Long-Horizon Equity Less Risky.

A Duration-Based Explanation of the Value Premium Abstract We propose a dynamic risk-based model that captures the value premium. Firms are modeled as long-lived assets distinguished by the timing of cash flows. The Cited by: Published: Martin Lettau & Jessica A. Wachter, "Why Is Long-Horizon Equity Less Risky.

A Duration-Based Explanation of the Value Premium," Journal of Finance, American Finance Association, vol. 62(1), pagescitation courtesy of.

Users. Request PDF | Why Is Long-Horizon Equity Less Risky. A Duration-Based Explanation of the Value Premium | We propose a dynamic risk-based model that captures the. Why Is Long‐Horizon Equity Less Risky.

A Duration‐Based Explanation of the Value Premium. habit formation and the term structures of equity and interest rates, Journal of Economic Dynamics and Control, 53, (),Returns to buying earnings and book value: accounting for growth and risk, Review of Accounting Studies, Why Is Long-Horizon Equity Less Risky.

57 () shows how asymmetric adjustment costs and a time-varying price of risk interact to produce value stocks that suffer increased risk during downturns. These models endogenously derive patterns in the cross section of returns from.

Why is long-horizon equity less risky. Why is long-horizon equity less risky. A duration-based explanation of the value premium in the data when portfolios are formed on the basis of book-to-market. We flnd an fion the value-minus-growth strategy of. Get this from a library. Why is long-horizon [equity] less risky?: a duration-based explanation of the value premium.

[Martin Lettau; Jessica Wachter; National Bureau of Economic Research.]. Downloadable. We propose a dynamic risk‐based model that captures the value premium. Firms are modeled as long‐lived assets distinguished by the timing of cash flows. The stochastic discount factor is specified so that shocks to aggregate dividends are priced, but shocks to the discount rate are not.

The model implies that growth firms covary more with the discount rate than do value firms. Lettau, Martin, and Jessica A. Wachter, “Why is long horizon equity less risky. A duration-based explanation of the value premium,” Journal of Finance, Vol.

62, No. 1, FebruaryLettau, Martin, and Jessica A. Wachter, “The term structures of equity and interest rates,” Journal of Financial Economics, Vol.July "Why is Long-Horizon Equity Less Risky.

A Duration-Based Explanation of the Value Premium," NBER Working Why is long-horizon [equity] less risky? bookNational Bureau of Economic Research, Inc. Jessica Wachter & Martin Lettau, "Why is Long-Horizon Equity Less Risky. A Duration-Based Explanation of the Value Premium," Meeting PapersSociety for Economic Dynamics.

Abstract Economists have suggested a whole range of variables that predict the equity premium: dividend price ratios, dividend yields, earnings-price ratios, dividend payout ratios, corporate or net issuing ratios, book-market ratios, beta premia, interest rates (in various guises), and consumption-based macroeconomic ratios (cay).

Equity risk premium refers to the excess return that investing in the stock market provides over a risk-free rate. This excess return compensates investors for taking on the relatively higher risk. Why is Long-Horizon Equity Less Risky.

A Duration-based Explanation of the Value Premium* This paper proposes a dynamic risk-based model that captures the high expected returns on value stocks relative to growth stocks, and the failure of the capital asset pricing model to explain these expected returns.

To modelCited by:   Historical cost accounting deals with uncertainty by deferring the recognition of earnings until the uncertainty has largely been resolved. Such accounting affects both earnings and book value and produces expected earnings growth deemed to be at risk.

This paper shows that the earnings-to-price and book-to-price ratios that are the product of this accounting forecast both earnings growth Cited by: Lettau, M. and J. Wachter,\Why is long-horizon equity less risky. A duration-based explanation of the value premium," Journal of Finance, 62 (1), 55{ van Binsbergen, J., M.

Brandt, and R. Koijen,\On the timing and pricing of dividends," American Economic Review, (4), { 7. Market frictions Transaction costs. Thus, the variance decomposition associated with the aggregate dividend yield has important heterogeneity in the cross section of equities.

Our results are robust to different forecasting horizons, econometric methodology (long-horizon regressions or first-order vector autoregression), and alternative decomposition based on excess by: We also show that, in order to explain empirical finding that long-horizon equity is less risky than short-horizon equity, the properties of the cash flow model and the values of primitive.

Lettau, Martin, and Jessica Wachter (), “Why is Long-Horizon Equity Less Risky. A Duration-Based Explanation of the Value Premium,” CEPR Discussion Paper No. The equity risk premium helps to set portfolio return expectations and determine asset allocation.

A higher premium implies that you would invest a greater share of your portfolio into : David R. Harper. March - Martin Lettau and Jessica A.

Wachter, Why Is Long-Horizon Equity Less Risky. A Duration-Based Explanation of the Value Premium March (published February ) - Massa, Rehman, Vermaelen, Mimicking Repurchases March - Boudoukh, Richardson, Whitelaw, The Myth of Long-Horizon Predictability.

Financial Economics Roberto Marf e Collegio Carlo Alberto Preliminary Syllabus book of the Economics of Finance, ed. by G. Constantinides, and R. Stulz, pp. Why Is Long-Horizon Equity Less Risky. A Duration-Based Explanation of the Value Premium. Journal of Fina 55{ Lettau, M., S. Ludvigson, and J.A.

Wachter. This paper proposes a measure of ex ante equity premium, IPOFDR, which is the average difference between the initial public offering (IPO) offer price and the 1st-trading-day close price.

I test the idea in 3 ways. First, there is a positive relation between IPOFDR and future market by: 9. A long-horizon analysis treats bonds very differently and assigns them a much more important role in the optimal portfolio. For long-term investors, an inflation-indexed long-term bond is actually less risky than cash.

Such a bond does not have a stable market value in the short term, but it delivers a predictable stream of real income and. a given year.' As the proxy for the first component, we use the market-to-book value of assets.

This value equals the market value of equity, plus the book value of debt, divided by the sum of the book values for the fiscal year just ended (MBAt_1). As the proxy for the second component, we use the ratio of R&D expenditures to total firm assets.

What is equity. This question is running in every Indian investor’s mind. Why. because equities have done very well in p 20, 30 years but investors are not able to make money.

What is equity – a share, market, a fund or an asset class. Yes in this article we will discuss everything related to equity that will help you in creating. The Equity Risk Premium: The Long-Run Future of the Stock Market (Frontiers in Finance Series Book 65) - Kindle edition by Cornell, Bradford.

Download it once and read it on your Kindle device, PC, phones or tablets. Use features like bookmarks, note taking and highlighting while reading The Equity Risk Premium: The Long-Run Future of the Stock Market (Frontiers in Finance Series Book 65)/5(6).

* Lettau, Martin, and Jessica A. Wachter (): Why is long-horizon equity less risky. A Duration-based explanation of the value premium, Journal of Fina Alexis Eisenhofer The value premium puzzle 27/29 Over a long horizon, private equity has certainly had a good run.

From toprivate equity returned percent per year, compared to percent per year for the S&P index. This percent outperformance was net of private equity’s “2 and 20” fee structure, meaning that the gross return of private equity over this period.

Swedroe: Stocks, Bonds & Risk. that equities dominate portfolios for investors who have a long horizon. His recommendation is based on the view that stocks are the less-risky investment when.

The thesis of the book is that the equity risk premium for stocks, which is the compensation given to equity investors for holding shares of risky common stocks, was below, perhaps much below, what was historically by: When we compare asset growth rates with the previously documented determinants of the cross-section of returns (i.e., book-to-market ratios, firm capitalization, lagged returns, accruals, and J A Wachter Why Is Long Horizon Equity Less Risky A Duration Based.

Jeremy Siegel's book Stocks for the Long Run led many to conclude that stocks aren't risky if you have a long horizon. However, that's simply not true. For more information on the source of this book, or why it is available for free, It is the “bird in the hand,” perhaps less risky than waiting for the eventual gain from the company’s retained earnings The portion of the company’s earnings or net income This strategy is optimal for investors with a long horizon, low risk.

The recursive relation for deriving the term structure of implied costs of equity–equation 4– is a function of the covariance between the stochastic discount factor and the firm’s equity return. To solve for the term structure empirically requires us to assume a tractable functional form for Cited by: The American Economic Review (1), { Lettau, M.

and J. Wachter (). Why is long-horizon equity less risky. A duration-based explanation of the value premium. Firm life expectancy and the heterogeneity of the book-to-market effect Firm life expectancy and the heterogeneity of the book-to-market effect Chen, Huafeng (Jason) I argue that the reason the book-to-market effect is stronger in small stocks is because smaller stocks generally have shorter life expectancy and therefore shorter equity : Chen, Huafeng (Jason).

Business valuation is a process and a set of procedures used to estimate the economic value of an owner's interest in a business. Valuation is used by financial market participants to determine the price they are willing to pay or receive to effect a sale of a business.

In addition to estimating the selling price of a business, the same valuation tools are often used by business appraisers to. Why is Long-horizon Equity Less Risky. A Duration-based Explanation of the Value Premium, To submit an update or takedown request for this paper, please submit an Update/Correction/Removal : Hui Guo and Robert Savickas.

Why Is Long-Horizon Equity Less Risky? A Duration-Based Explanation of the Value Premium,” To submit an update or takedown request for this paper, please Author: Robert Novy-Marx.Time Horizons and Technology Investments explores the evidence that some U.S.

corporations consistently select projects biased toward short-term return and addresses factors influencing the time-related preferences of U.S. corporate managers in selecting projects for investment. It makes recommendations to policymakers and managers about.Thus over this long sample returns appeared signi ficantly less risky at long horizons than would be implied by their short-run behaviour if returns were un- predictable, with a variance ratio of ar ound one quarter at a horizon of 40 years.

5.