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Are Stocks Really Less Volatile in the Long Run?

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  • Lubos Pastor
  • Robert F. Stambaugh

Abstract

According to conventional wisdom, annualized volatility of stock returns is lower when computed over long horizons than over short horizons, due to mean reversion induced by return predictability. In contrast, we find that stocks are substantially more volatile over long horizons from an investor’s perspective. This perspective recognizes that parameters are uncertain, even with two centuries of data, and that observable predictors imperfectly deliver the conditional expected return. Mean reversion contributes strongly to reducing long-horizon variance, but it is more than offset by various uncertainties faced by the investor, especially uncertainty about the expected return. The same uncertainties also make target-date funds undesirable to a class of investors who would otherwise find them appealing.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14757.

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Date of creation: Feb 2009
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Publication status: published as Ľuboš Pástor & Robert F. Stambaugh, 2012. "Are Stocks Really Less Volatile in the Long Run?," Journal of Finance, American Finance Association, vol. 67(2), pages 431-478, 04.
Handle: RePEc:nbr:nberwo:14757

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Cited by:
  1. Ulrich Mueller & Mark W. Watson, 2013. "Measuring Uncertainty about Long-Run Prediction," NBER Working Papers 18870, National Bureau of Economic Research, Inc.
  2. Pettenuzzo, Davide & Timmermann, Allan G & Valkanov, Rossen, 2013. "Forecasting Stock Returns under Economic Constraints," CEPR Discussion Papers, C.E.P.R. Discussion Papers 9377, C.E.P.R. Discussion Papers.
  3. Daniele Pennesi, 2013. "Asset Prices in an Ambiguous Economy," Carlo Alberto Notebooks, Collegio Carlo Alberto 315, Collegio Carlo Alberto.
  4. Dangl, Thomas & Halling, Michael, 2012. "Predictive regressions with time-varying coefficients," Journal of Financial Economics, Elsevier, Elsevier, vol. 106(1), pages 157-181.
  5. Bec, Frédérique & Gollier, Christian, 2009. "Cyclicality and Term Structure of Value-at-Risk in Europe," IDEI Working Papers, Institut d'Économie Industrielle (IDEI), Toulouse 587, Institut d'Économie Industrielle (IDEI), Toulouse.
  6. Georges Prat, 2010. "Equity Risk Premium and Time Horizon : What do the U.S. Secular Data Say ?," EconomiX Working Papers 2010-22, University of Paris West - Nanterre la Défense, EconomiX.
  7. Jessica Wachter, 2010. "Asset Allocation," NBER Working Papers 16255, National Bureau of Economic Research, Inc.
  8. Hui Chen & Nengjiu Ju & Jianjun Miao, 2008. "Dynamic Asset Allocation with Ambiguous Return Predictability," Boston University - Department of Economics - The Institute for Economic Development Working Papers Series, Boston University - Department of Economics dp-179, Boston University - Department of Economics, revised Feb 2009.
  9. Li, Minqiang, 2010. "Asset Pricing - A Brief Review," MPRA Paper 22379, University Library of Munich, Germany.
  10. Carlo A. Favero & Andrea Tamoni, 2010. "Demographics and the Econometrics of the Term Structure of Stock Market Risk," Working Papers, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University 367, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University.
  11. Al-Shboul, Mohammad & Anwar, Sajid, 2014. "Time-varying exchange rate exposure and exchange rate risk pricing in the Canadian Equity Market," Economic Modelling, Elsevier, Elsevier, vol. 37(C), pages 451-463.
  12. Mark W. Watson, 2013. "Comment on "Shocks and Crashes"," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2013, Volume 28, pages 367-378 National Bureau of Economic Research, Inc.
  13. Richard W. Kopcke & Dan Muldoon, 2009. "Why Are Stocks So Risky?," Issues in Brief, Center for Retirement Research ib2009-9-23, Center for Retirement Research, revised Nov 2009.
  14. Pettenuzzo, Davide & Timmermann, Allan, 2011. "Predictability of stock returns and asset allocation under structural breaks," Journal of Econometrics, Elsevier, Elsevier, vol. 164(1), pages 60-78, September.

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