The investment horizon and asset pricing models

Publication Type:
Journal Article
Australian Journal of Management, 2015, 40 (2), pp. 277 - 294
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© The Author(s) 2014 The Life Cycle Hypothesis suggests that the primary motivation for saving is to accumulate resources in order to fund retirement. This suggests that investors have heterogeneous investment horizons, yet many tests of the CAPM assume homogeneous horizons. This paper estimates a time varying heterogeneous investment horizon using over 200 years of demographic data. We test the CAPM and its assumption that the Equity Risk Premium is positive using our estimated investment horizon. We conclude that the CAPM is not violated when tested over a horizon that more accurately reflects investor behavior.
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