In this paper we explore the theoretical and empirical problems of estimating average (excess) return and risk of US equities over various holding periods and sample periods. Our findings are relevant for performance evaluation, for estimating the historical equity risk premium, and for investment simulation. Using a unique set of US equity data series, comprising monthly prices and dividends based on consistent definitions over the 132 year period 1871-2002, we investigate the complex effect of temporal return aggregation and sample estimation error. Our major finding is that holding period risk and return statistics show an extraordinary sensitivity to the choice of the starting point in calendar time. For example, over the period 1926-2002 there is a difference of almost 140 basis points between the average annual total return starting in January compared to starting in July, and a difference of almost 7 (!) percentage points in estimated annual volatility. This is yet another way in which stock price seasonality manifests itself, but this ambiguity in the underlying estimation process seems completely neglected in the current literature.

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Keywords equity risk premium, holding period return, stock price seasonality, temporal aggregation
JEL Estimation (jel C13), Time-Series Models; Dynamic Quantile Regressions (jel C22), Data Collection and Data Estimation Methodology; Computer Programs: Other (jel C89), Information and Market Efficiency; Event Studies (jel G14), Corporate Finance and Governance (jel G3), Business Administration and Business Economics; Marketing; Accounting (jel M)
Persistent URL
Series ERIM Report Series Research in Management
Hallerbach, W.G.P.M. (2003). Holding Period Return-Risk Modeling: Ambiguity in Estimation (No. ERS-2003-063-F&A). ERIM Report Series Research in Management. Retrieved from