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Volatility Expectations and Returns

Lars A. Lochstoer and Tyler Muir

No 28102, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We provide evidence that agents have slow-moving beliefs about stock market volatility that lead to initial underreaction to volatility shocks followed by delayed overreaction. These dynamics are mirrored in the VIX and variance risk premiums which reflect investor expectations about volatility and are also supported in surveys and in firm-level option prices. We embed these expectations into an asset pricing model and find that the model can account for a number of stylized facts about market returns and return volatility which are difficult to reconcile, including a weak, or even negative, risk-return tradeoff.

JEL-codes: G0 G12 G4 (search for similar items in EconPapers)
Date: 2020-11
New Economics Papers: this item is included in nep-fmk and nep-rmg
Note: AP
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Published as LARS A. LOCHSTOER & TYLER MUIR, 2022. "Volatility Expectations and Returns," The Journal of Finance, vol 77(2), pages 1055-1096.

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