70 Pages Posted: 9 Jun 2015 Last revised: 3 Mar 2017
Date Written: February 28, 2017
We study whether stocks are riskier or safer in the long run from the perspective of Bayesian investors who employ the long-run risk, habit formation, or prospect theory models to form prior beliefs about return dynamics. Economic theory delivers important guidance for long-run investment opportunities. Specifically, incorporating prior information from the habit formation or prospect theory models reinforces beliefs in mean reversion and inferences that stocks are safer over longer horizons. Conversely, investors with long-run risk priors perceive weaker mean reversion and riskier equities. Model-based information is particularly important for inferences about uncertainty in the dividend growth component of returns.
Suggested Citation: Suggested Citation
Avramov, Doron and Cederburg, Scott and Lucivjanska, Katarina, Are Stocks Riskier Over the Long Run? Taking Cues from Economic Theory (February 28, 2017). Available at SSRN: https://ssrn.com/abstract=2615919 or http://dx.doi.org/10.2139/ssrn.2615919
By Andrew Ang