Stock returns and volatility: pricing the short-run and long-run components of market risk
Tobias Adrian () and
Joshua Rosenberg ()
No 254, Staff Reports from Federal Reserve Bank of New York
We decompose the time series of equity market risk into short- and long-run volatility components. Both components have negative and highly significant prices of risk in the cross section of equity returns. A three-factor model with the market return and the two volatility components compares favorably to benchmark models. We show that the short-run component captures market skewness risk, while the long-run component captures business cycle risk. Furthermore, short-run volatility is the more important cross-sectional risk factor, even though its average risk premium is smaller than the premium of the long-run component.
Keywords: Stocks - Rate of return; Risk (search for similar items in EconPapers)
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Journal Article: Stock Returns and Volatility: Pricing the Short-Run and Long-Run Components of Market Risk (2008)
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