Horizon Bias and the Term Structure of Equity Returns

Abstract

We label the degree to which individuals are more optimistic at long horizons relative to short horizons as the horizon bias. We examine whether time-series variation in the horizon bias can explain the time-series variation in the equity term structure. We use analyst earnings forecasts to measure the degree of the horizon bias in the stock market. Consistent with the intuition from a stylized present value model, we find that periods of above-average horizon bias are associated with negative term premiums, whereas periods of below-average horizon bias are associated with positive term premiums.