Method for choosing appropriate investment periods to make arbitrage profit and explain stock returns
The current paper presents theoretical and experimental evidence to justify the need for payingattention to the investment horizon. Therefore, a criterion called the ‘Safest Investment Horizon’(SIH) is utilized to select the appropriate investment horizon. To compute this quantity, a ratio calledthe...
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| Format: | Article |
| Language: | English |
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University in Belgrade
2022-11-01
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| Series: | Serbian Journal of Management |
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| Online Access: | https://aseestant.ceon.rs/index.php/sjm/article/view/33561/21635 |
| Summary: | The current paper presents theoretical and experimental evidence to justify the need for payingattention to the investment horizon. Therefore, a criterion called the ‘Safest Investment Horizon’(SIH) is utilized to select the appropriate investment horizon. To compute this quantity, a ratio calledthe ‘Safest Investment Ratio’ (SIR) is calculated, and the relationship between these criteria andarbitrage opportunities, along with methods for making an arbitrage profit through selecting anappropriate time horizon are discussed. Afterward, by applying this method for real-life data, thepresence of arbitrage opportunities at different time horizons is confirmed. Furthermore, the effectsof the time horizon on optimal portfolio composition are described. Finally, it is shown that thesecriteria outperform some of the conventional variables in CAPM, the 3-factor, and the 5-factormodels for explaining stock returns and using SIH or SIR as a new variable increases the explanatorypower of these models. |
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| ISSN: | 1452-4864 2217-7159 |