Conditional Dynamics and the Multihorizon Risk-Return Trade-Off

Abstract We propose testing asset pricing models using multihorizon returns (MHRs). MHRs effectively generate a new set of test assets that is endogenous to the model and identifies broad possible conditional misspecifications. apply MHR-based prominent linear factor show these typically do poor job longer-horizon returns, with errors are similar in magnitude risk premiums they were designed explain. trace dynamics. Explicitly incorporating timing into often makes mispricing worse, thereby posing challenge for future research.