Should Long-Term Investors Time Volatility?

Alan Moreira and Tyler Muir

Journal of Financial Economics, 2019, vol. 131, issue 3, 507-527

Abstract: A long-term investor who ignores variation in volatility gives up the equivalent of 2.4% of wealth per year. This result holds for a wide range of parameters that are consistent with US stock market data, and it is robust to estimation uncertainty. We propose and test a new channel, the volatility composition channel, for how investment horizon interacts with volatility timing. Investors respond substantially less to volatility variation if the amount of mean reversion in returns disproportionally increases with volatility and also if mean reversion happens quickly. We find that these conditions are unlikely to hold in the data.

Keywords: Volatility; Portfolio choice; Market timing; Mean reversion (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (25)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:131:y:2019:i:3:p:507-527

DOI: 10.1016/j.jfineco.2018.09.011

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