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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)
New Economics Papers: this item is included in nep-ets, nep-fmk and nep-rmg
Date: 2006
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Journal Article: Stock Returns and Volatility: Pricing the Short-Run and Long-Run Components of Market Risk (2008) Downloads
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