Title: Horizon-specific risks, higher moments, and asset prices
Authors: Josef Kurka - UTIA AV CR, v.v.i. (Czech Republic) [presenting]
Jozef Barunik - UTIA AV CR vvi (Czech Republic)
Abstract: Asset pricing traditionally works with information aggregated over horizons, however investors' preferences are horizon-specific. Decomposing returns, and risk factors to components representing individual horizons may hence provide valuable insights into pricing mechanisms of investors. With increasing size of factor-investing literature, the number of factors approximating risk, and possibly explaining the cross section of returns is growing rapidly. However, most of the factors perform poorly in subsequent out-of-sample testing. Therefore, attention should be turned to theory-based factors approximating the risks such as moments of the return distribution that are found to be priced empirically. We derive an asset pricing model that contains second, third and fourth centralized moments of returns on aggregate wealth decomposed to short-run and long-run components. Empirical results show that horizon-specific risk from higher moments is priced, and uncover different effects of the moment-based risk factors in short-run, and long-run.