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

Abstract: 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)
Date: 2006
New Economics Papers: this item is included in nep-ets, nep-fmk and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (49)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr254.html (text/html)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr254.pdf (application/pdf)

Related works:
Journal Article: Stock Returns and Volatility: Pricing the Short‐Run and Long‐Run Components of Market Risk (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:254

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().