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- Title
Market Equilibrium and the Cost of Capital with Heterogeneous Investment Horizons.
- Authors
Levy, Moshe; Levy, Haim
- Abstract
Expected returns, variances, betas, and alphas are all non-linear functions of the investment horizon. This seems to be a fatal conceptual problem for the capital asset pricing model (CAPM), which assumes a unique common horizon for all investors. We show that under the standard assumptions, the theoretical CAPM equilibrium surprisingly holds with the 1-period parameters, even when investors have heterogeneous and possibly much longer horizons. This is true not only for risk-averse investors, but for any investors with non-decreasing preferences, including prospect theory investors. Thus, the widespread practice of using monthly betas to estimate the cost of capital is theoretically justified.
- Subjects
CAPITAL assets pricing model; CAPITAL costs; MARKET equilibrium; CAPITAL investments; MARKETING costs; INVESTORS
- Publication
Risks, 2024, Vol 12, Issue 3, p44
- ISSN
2227-9091
- Publication type
Article
- DOI
10.3390/risks12030044