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The Effect of Long Term Dependence on Risk-Return Models of Common Stocks

Author

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  • Myron T. Greene

    (Georgia State University, Atlanta, Georgia)

  • Bruce D. Fielitz

    (Georgia State University, Atlanta, Georgia)

Abstract

In a previous paper the authors have shown that common stock returns are characterized by a phenomenon called long term dependence. The present paper discusses the implications of the presence of long term dependence for existing risk-return models in finance. Specifically, it is shown that (1) risk rankings of stocks or portfolios tend to vary with the differencing interval chosen to measure security returns, (2) efficient portfolios vary with the differencing interval selected, and (3) the unrealistic, homogeneous time horizon assumption of the capital asset pricing model must be retained in order for the model to hold.

Suggested Citation

  • Myron T. Greene & Bruce D. Fielitz, 1979. "The Effect of Long Term Dependence on Risk-Return Models of Common Stocks," Operations Research, INFORMS, vol. 27(5), pages 944-951, October.
    • Handle: RePEc:inm:oropre:v:27:y:1979:i:5:p:944-951
    DOI: 10.1287/opre.27.5.944
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    Cited by:

    1. Bai, Lan & Wei, Yu & Zhang, Jiahao & Wang, Yizhi & Lucey, Brian M., 2023. "Diversification effects of China's carbon neutral bond on renewable energy stock markets: A minimum connectedness portfolio approach," Energy Economics, Elsevier, vol. 123(C).
    2. Sethuraman, S. & Basawa, I. V., 1997. "The asymptotic distribution of the maximum likelihood estimator for a vector time series model with long memory dependence," Statistics & Probability Letters, Elsevier, vol. 31(4), pages 285-293, February.
    3. Jacobsen, Ben, 1996. "Long term dependence in stock returns," Journal of Empirical Finance, Elsevier, vol. 3(4), pages 393-417, December.
    4. Gori, F. & Ludovisi, D. & Cerritelli, P.F., 2007. "Forecast of oil price and consumption in the short term under three scenarios: Parabolic, linear and chaotic behaviour," Energy, Elsevier, vol. 32(7), pages 1291-1296.

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