Date of this Version
The Journal of Finance
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.
This is the peer reviewed version of the following article: PÁSTOR, Ľ. and STAMBAUGH, R. F. (2012), Are Stocks Really Less Volatile in the Long Run?. The Journal of Finance, 67: 431–478. doi:10.1111/j.1540-6261.2012.01722.x, which has been published in final form at http://dx.doi.org/10.1111/j.1540-6261.2012.01722.x. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving http://olabout.wiley.com/WileyCDA/Section/id-820227.html#terms
Pástor, Ľ., & Stambaugh, R. F. (2012). Are Stocks Really Less Volatile in the Long Run?. The Journal of Finance, 67 (2), 431-478. http://dx.doi.org/10.1111/j.1540-6261.2012.01722.x
Date Posted: 27 November 2017
This document has been peer reviewed.