Are Stocks Really Less Volatile in the Long Run?

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Finance Papers
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Finance
Finance and Financial Management
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Pástor, Ľuboš
Stambaugh, Robert F
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According to conventional wisdom, annualized volatility of stock returns is lower 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 is more than offset by various uncertainties faced by the investor. The same uncertainties reduce desired stock allocations of long-horizon investors contemplating target-date funds.

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2012-04-01
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The Journal of Finance
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