Should Long-Term Investors Time Volatility?
61 Pages Posted: 3 Dec 2016 Last revised: 16 Jan 2018
Date Written: January 12, 2018
A long-term investor who ignores variation in volatility gives up the equivalent of 2.4% of wealth per year. This result holds for a wide range of parameters that are consistent with U.S. stock market data and it is robust to estimation uncertainty. We propose and test a new channel, the volatility-composition channel, for how investment horizon interacts with volatility timing. Investors respond substantially less to volatility variation if the amount of mean-reversion in returns disproportionally increases with volatility and also if mean-reversion happens quickly. We find that these conditions are unlikely to hold in the data.
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