← Search

Journal of Finance Vol. 63 No. 6 2008

Stock Returns and Volatility: Pricing the Short‐Run and Long‐Run Components of Market Risk

Tobias Adrian1,2,3,4,5,6,7; Joshua V. Rosenberg1,2,3,4,5,6,7

1 Princeton University · 2 University of Massachusetts Amherst · 3 Queens University · 4 Barclays (United Kingdom) · 5 Platinum Group Coatings (United States) · 6 SV Health Investors (United States) · 7 Federal Reserve Bank of New York

open access

Abstract

We explore the cross‐sectional pricing of volatility risk by decomposing equity market volatility into short‐ and long‐run components. Our finding that prices of risk are negative and significant for both volatility components implies that investors pay for insurance against increases in volatility, even if those increases have little persistence. The short‐run component captures market skewness risk, which we interpret as a measure of the tightness of financial constraints. The long‐run component relates to business cycle risk. Furthermore, a three‐factor pricing model with the market return and the two volatility components compares favorably to benchmark models.

DOI
10.1111/j.1540-6261.2008.01419.x
Volume
63
Issue
6
Pages
2997-3030
Language
en
Sources
bibtex:phds-export.bib openalex crossref

Cite