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Time Diversification: Empirical Tests
Author(s) -
Strong Norman,
Taylor Nicholas
Publication year - 2001
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00374
Subject(s) - diversification (marketing strategy) , economics , equity (law) , financial economics , portfolio , time preference , ex ante , investment portfolio , investment (military) , alternative investment , econometrics , asset allocation , investment strategy , monetary economics , microeconomics , business , macroeconomics , marketing , politics , political science , market liquidity , law
This paper investigates the relationship between the performance of equity and the length of the investment horizon used by investors. We examine optimal portfolio time diversification and two definitions of ex ante time diversification. Using almost two centuries of US and UK data we find some support for the hypothesis that equity represents a significantly better investment over long investment horizons than over short investment horizons. Where this result holds, the likely explanation is mean‐aversion in fixed‐income asset returns. However, these results are sensitive to changes in investor risk preference, changes in utility function specification, changes in the sample period used, changes in investor constraints, and the definition of time diversification adopted. They also differ between the US and UK markets.