Long-horizon asset returns

Purpose and goal

Over time, returns to financial assets accumulate, or “compound”, through the “interest-on-interest” effect. For long investment horizons (e.g., 10 or 30 years), compounding induces effects that are not evident when simply looking at the properties of single-period (e.g., monthly) returns. An explicit analysis of long-run returns is therefore needed to help long-run investors make informed decisions. We will provide a theoretical and empirical foundation to understand long-run compound returns, with direct guidance for long-run investors.

Expected effects and result

Our findings and results will have direct bearing on long-run investment decisions, such as retirement savings and investments in mutual funds. We hope, for instance, to be able to give clear practical guidance on the best ways to model and forecast long-run returns. More generally, we expect to demonstrate how long investment horizons affect perceptions and quantifications of risk and expected payoffs, which form the fundamental inputs into any investment decision.

Planned approach and implementation

Each sub-project will follow a similar work-sequence of (i) analysis, (ii) write-up, (iii) seminar presentations, and (iv) submissions to international journals. The project is an extension and deepening of an ongoing agenda, and we will therefore be able to start immediately. The research team is all male, which reflects a large gender imbalance amongst finance researchers generally. If additional collaborators are needed, we will strive for a more balanced composition in terms of gender, while ensuring that academic excellence is maintained.