Volatility Lessons

20 Pages Posted: 4 Dec 2017 Last revised: 19 Oct 2018

See all articles by Eugene F. Fama

Eugene F. Fama

University of Chicago - Finance

Kenneth R. French

Dartmouth College - Tuck School of Business; National Bureau of Economic Research (NBER)

Date Written: May 1, 2018

Abstract

The average monthly premium of the Market return over the one-month T-Bill return is substantial, as are average premiums of value and small stocks over Market. As the return horizon increases, premium distributions become more disperse, but they move to the right (toward higher values) faster than they become more disperse. There is, however, some bad news. Even if future expected premiums match high past averages, high volatility means that for the three- and five-year periods commonly used to evaluate asset allocations, the probabilities of negative realized premiums are substantial, and the probabilities are nontrivial for ten-year and 20-year periods.

Suggested Citation

Fama, Eugene F. and French, Kenneth R., Volatility Lessons (May 1, 2018). Chicago Booth Research Paper No. 17-33; Fama-Miller Working Paper. Available at SSRN: https://ssrn.com/abstract=3081101 or http://dx.doi.org/10.2139/ssrn.3081101

Eugene F. Fama (Contact Author)

University of Chicago - Finance ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7282 (Phone)
773-702-9937 (Fax)

Kenneth R. French

Dartmouth College - Tuck School of Business ( email )

Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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