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Are Stocks Really Less Volatile in the Long Run?

  • Lubos Pastor
  • Robert F. Stambaugh

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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File URL: http://www.nber.org/papers/w14757.pdf
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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
Note: AP
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