On the Long Run Volatility of Stocks

The Journal of the American Statistical Association, 2018 Forthcoming

42 Pages Posted: 13 Jul 2016 Last revised: 9 Feb 2018

Carlos M. Carvalho

University of Texas at Austin - Red McCombs School of Business

Hedibert Lopes

Insper

Robert E. McCulloch

University of Chicago - Booth School of Business

Date Written: October 25, 2017

Abstract

In this paper we investigate whether or not the volatility per period of stocks is lower over longer horizons. Taking the perspective of an investor, we evaluate the predictive variance of k-period returns under different model and prior specifications. We adopt the state space framework of P ́astor and Stambaugh [2012] to model the dynamics of expected returns and evaluate the effects of prior elicitation in the resulting volatility estimates. Part of the developments includes an extension that incorporates time-varying volatilities and covariances in a constrained prior information set up. Our conclusion for the U.S. market, under plausible prior specifications, is that stocks are less volatile in the long run. Model assessment exercises demonstrate the models and priors supporting our main conclusions are in accordance with the data. To assess the generality of the results, we extend our analysis to a number of international equity indices.

Suggested Citation

Carvalho, Carlos M. and Lopes, Hedibert and McCulloch, Robert E., On the Long Run Volatility of Stocks (October 25, 2017). The Journal of the American Statistical Association, 2018 Forthcoming. Available at SSRN: https://ssrn.com/abstract=2808191 or http://dx.doi.org/10.2139/ssrn.2808191

Carlos M. Carvalho (Contact Author)

University of Texas at Austin - Red McCombs School of Business ( email )

Austin, TX 78712
United States

Hedibert Lopes

Insper ( email )

R Quata 300
Sao Paulo, 04542-030
Brazil

HOME PAGE: http://www.hedibert.org

Robert E. McCulloch

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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