Munich Personal RePEc Archive

Time Diversification: Perspectives from the Economic Index of Riskiness

Lu, Richard and Yang, Chen-Chen and Wong, Wing-Keung (2018): Time Diversification: Perspectives from the Economic Index of Riskiness. Forthcoming in: Annals of Financial Economics

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Time diversification which is the idea of there being less riskiness over longer investment horizons is examined in this paper. Different from previous studies, this paper contributes to the literature by using the Aumann and Serrano index as a risk measure to examine whether there is any time diversification in stock investment by using the daily return of the S&P 500, the S&P 400, and the NASDAQ with both short and long holding periods and by using the block bootstrapping technique in the simulation. From returns of short (long) holding periods, we conclude that, in general, the riskiness of the shorter (longer) period is statistically greater than that of the longer (shorter) period. Our findings reject the hypothesis of no time diversification effect and reject the geometric Brownie motion process for the returns of different holding periods. The results could be due to short- and medium-term momentum and long-term contrarian. Our findings are useful to academics, investors, and policy makers in their decision making related to time diversification.

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