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When Are Stocks Less Volatile in the Long Run?

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  • Jondeau, Eric
  • Zhang, Qunzi
  • Zhu, Xiaoneng

Abstract

Pástor and Stambaugh (2012) find that from a forward-looking perspective, stocks are more volatile in the long run than they are in the short run. We demonstrate that when the nonnegative equity premium (NEP) condition is imposed on predictive regressions, stocks are in fact less volatile in the long run, even after taking estimation risk and uncertainties into account. The reason is that the NEP provides an additional parameter identification condition and prior information for future returns. Combined with the mean reversion of stock returns, this condition substantially reduces uncertainty on future returns and leads to lower long-run predictive variance.

Suggested Citation

  • Jondeau, Eric & Zhang, Qunzi & Zhu, Xiaoneng, 2021. "When Are Stocks Less Volatile in the Long Run?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(4), pages 1228-1258, June.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:4:p:1228-1258_4
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    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General

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