Are Stocks Riskier over the Long Run? Taking Cues from Economic Theory

Doron Avramov; Scott Cederburg; Katarína Lučivjanská

doi:10.1093/rfs/hhx079

Are Stocks Riskier over the Long Run? Taking Cues from Economic Theory

Doron Avramov¹; Scott Cederburg²; Katarína Lučivjanská³

¹ Hebrew University of Jerusalem and Chinese University of Hong Kong · ² University of Arizona · ³ Pavol Jozef Šafárik University in KoŠice

Review of Financial Studies 2018 open access

We study whether stocks are riskier or safer in the long run from the perspective of Bayesian investors who employ the long-run risk, habit formation, or prospect theory models to form prior beliefs about return dynamics. Economic theory delivers important guidance for long-run investment opportunities. Specifically, incorporating prior information from the habit formation or prospect theory models reinforces beliefs in mean reversion and inferences that stocks are safer over longer horizons. Conversely, investors with long-run risk priors perceive weaker mean reversion and riskier equities. Model-based information is particularly important for inferences about uncertainty in the dividend growth component of returns. Received May 18, 2016; editorial decision April 25, 2017 by Editor Stijn Van Nieuwerburgh.

DOI: 10.1093/rfs/hhx079
Volume: 31 (2)
Pages: 556-594
Language: en
Export: BibTeX
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