When Are Stocks Less Volatile in the Long Run?

49 Pages Posted: 30 Jan 2018 Last revised: 9 Feb 2018

See all articles by Eric Jondeau

Eric Jondeau

University of Lausanne - Faculty of Business and Economics (HEC Lausanne); Swiss Finance Institute

Qunzi Zhang

Shandong University

Xiaoneng Zhu

Shanghai University of Finance and Economics

Date Written: December 1, 2017

Abstract

Pastor and Stambaugh (2012) demonstrate that from a forward-looking perspective, stocks are more volatile in the long run than they are in the short run. We investigate how the economic constraint of non-negative equity premia aspects predictive variance. When investors expect non-negative returns in the market and thus impose the constraint on predictive regressions, they find that stocks are less volatile in the long run, even after taking account of estimation risk and uncertainties on current and future expected stock returns because the constraint provides additional parameter identification condition and prior information for future returns. Thus, it substantially reduces uncertainty on future stock returns. This fact, combined with the mean reversion property of stock return dynamics, leads to lower predictive variance in the long run.

Keywords: Bayesian method, predictive variance, non-negative equity premium

JEL Classification: G1, C11

Suggested Citation

Jondeau, Eric and Zhang, Qunzi and Zhu, Xiaoneng, When Are Stocks Less Volatile in the Long Run? (December 1, 2017). Swiss Finance Institute Research Paper No. 18-07. Available at SSRN: https://ssrn.com/abstract=3112068 or http://dx.doi.org/10.2139/ssrn.3112068

Eric Jondeau (Contact Author)

University of Lausanne - Faculty of Business and Economics (HEC Lausanne) ( email )

Extranef 232
Lausanne, 1012
Switzerland
+41 21 692 33 49 (Phone)

HOME PAGE: http://www.hec.unil.ch/ejondeau/

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Qunzi Zhang

Shandong University ( email )

27 Shanda Nanlu
South Rd.
Jinan, Shandong 250100
China

HOME PAGE: http://www.econ.sdu.edu.cn/tree/content.php?id=52869

Xiaoneng Zhu

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China

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