Are Stocks Really Less Volatile in the Long Run?
Article first published online: 27 MAR 2012
© 2012 the American Finance Association
The Journal of Finance
Volume 67, Issue 2, pages 431–478, April 2012
How to Cite
PÁSTOR, Ľ. and STAMBAUGH, R. F. (2012), Are Stocks Really Less Volatile in the Long Run?. The Journal of Finance, 67: 431–478. doi: 10.1111/j.1540-6261.2012.01722.x
- Issue published online: 27 MAR 2012
- Article first published online: 27 MAR 2012
According to conventional wisdom, annualized volatility of stock returns is lower over long horizons than over short horizons, due to mean reversion induced by return predictability. In contrast, we find that stocks are substantially more volatile over long horizons from an investor’s perspective. This perspective recognizes that parameters are uncertain, even with two centuries of data, and that observable predictors imperfectly deliver the conditional expected return. Mean reversion contributes strongly to reducing long-horizon variance but is more than offset by various uncertainties faced by the investor. The same uncertainties reduce desired stock allocations of long-horizon investors contemplating target-date funds.