Are Stocks Really Less Volatile in the Long Run?

Lubos Pastor and Robert Stambaugh

No 14757, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: According to conventional wisdom, annualized volatility of stock returns is lower when computed over long horizons than over short horizons, due to mean reversion induced by return predictability. In contrast, we find that stocks are substantially more volatile over long horizons from an investor's perspective. This perspective recognizes that parameters are uncertain, even with two centuries of data, and that observable predictors imperfectly deliver the conditional expected return. Mean reversion contributes strongly to reducing long-horizon variance, but it is more than offset by various uncertainties faced by the investor, especially uncertainty about the expected return. The same uncertainties also make target-date funds undesirable to a class of investors who would otherwise find them appealing.

JEL-codes: G11 G12 G23 (search for similar items in EconPapers)
Date: 2009-02
New Economics Papers: this item is included in nep-fmk
Note: AP
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Citations: View citations in EconPapers (11)

Published as Ľuboš Pástor & Robert F. Stambaugh, 2012. "Are Stocks Really Less Volatile in the Long Run?," Journal of Finance, American Finance Association, vol. 67(2), pages 431-478, 04.

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Related works:
Journal Article: Are Stocks Really Less Volatile in the Long Run? (2012)
Working Paper: Are Stocks Really Less Volatile in the Long Run? (2009)
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