IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/28102.html
   My bibliography  Save this paper

Volatility Expectations and Returns

Author

Listed:
  • Lars A. Lochstoer
  • Tyler Muir

Abstract

We provide evidence that agents have slow-moving beliefs about stock market volatility that lead to initial underreaction to volatility shocks followed by delayed overreaction. These dynamics are mirrored in the VIX and variance risk premiums which reflect investor expectations about volatility and are also supported in surveys and in firm-level option prices. We embed these expectations into an asset pricing model and find that the model can account for a number of stylized facts about market returns and return volatility which are difficult to reconcile, including a weak, or even negative, risk-return tradeoff.

Suggested Citation

  • Lars A. Lochstoer & Tyler Muir, 2020. "Volatility Expectations and Returns," NBER Working Papers 28102, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:28102
    Note: AP
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w28102.pdf
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lee, Eun Jung & Lee, Yu Kyung & Kim, Ryumi, 2022. "Investor attention and the risk-return trade-off," Finance Research Letters, Elsevier, vol. 47(PA).
    2. Olkhov, Victor, 2022. "Economic Policy - the Forth Dimension of the Economic Theory," MPRA Paper 112685, University Library of Munich, Germany.
    3. Wang, Hailong & Hu, Duni, 2022. "Heterogenous beliefs with sentiments and asset pricing," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    4. Jon Danielsson & Marcela Valenzuela & Ilknur Zer, 2023. "The Impact of Risk Cycles on Business Cycles: A Historical View," The Review of Financial Studies, Society for Financial Studies, vol. 36(7), pages 2922-2961.

    More about this item

    JEL classification:

    • G0 - Financial Economics - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G4 - Financial Economics - - Behavioral Finance

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:28102. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.