Should Long-Term Investors Time Volatility?

61 Pages Posted: 3 Dec 2016 Last revised: 16 Jan 2018

See all articles by Alan Moreira

Alan Moreira

University of Rochester - Simon Business School

Tyler Muir

University of California, Los Angeles (UCLA) - Anderson School of Management; National Bureau of Economic Research (NBER)

Date Written: January 12, 2018

Abstract

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.

Suggested Citation

Moreira, Alan and Muir, Tyler, Should Long-Term Investors Time Volatility? (January 12, 2018). Available at SSRN: https://ssrn.com/abstract=2879234 or http://dx.doi.org/10.2139/ssrn.2879234

Alan Moreira

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

Tyler Muir (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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