TY - JOUR
T1 - Are stocks riskier over the long run? Taking cues from economic theory
AU - Avramov, Doron
AU - Avramov, Doron
AU - Cederburg, Scott
AU - Lučivjanská, Katarína
N1 - Funding Information:
We thank Stijn Van Nieuwerburgh (the editor), two anonymous referees, John Cochrane, Thomas Dangl, Anisha Ghosh, Stefano Giglio, Gregor Kastner, Chris Lamoureux, Michael O’Doherty, Ľuboš Pástor, Rick Sias, and participants at the Eastern Finance Association Meeting, the European Finance Association Meeting, the Northern Finance Association Meeting, the Slovak Economic Association Meeting, and the Workshop on Asset Allocation under Parameter Uncertainty for helpful comments. Avramov gratefully acknowledges support from the Israel Science Foundation (grant no. 233/14) and Lučivjanská gratefully acknowledges support from the Slovak Scientific Grant Agency (VEGA grant no. 1/0344/14) and the Slovak Research and Development Agency (contract no. APVV-14-0357). All errors are our own. Supplementary data can be found on The Review of Financial Studies
Funding Information:
We thank Stijn Van Nieuwerburgh (the editor), two anonymous referees, John Cochrane, Thomas Dangl, Anisha Ghosh, Stefano Giglio, Gregor Kastner, Chris Lamoureux, Michael O’Doherty, Lˇuboš Pástor, Rick Sias, and participants at the Eastern FinanceAssociation Meeting, the European FinanceAssociation Meeting, the Northern Finance Association Meeting, the Slovak Economic Association Meeting, and the Workshop on Asset Allocation under Parameter Uncertainty for helpful comments. Avramov gratefully acknowledges support from the Israel Science Foundation (grant no. 233/14) and Lucˇivjanská gratefully acknowledges support from the Slovak ScientificGrantAgency(VEGAgrantno.1/0344/14)andtheSlovakResearchandDevelopmentAgency(contract no.APVV-14-0357).All errors are our own. Supplementary data can be found on The Review of Financial Studies web site. Send correspondence to Scott Cederburg, University of Arizona, McClelland Hall 315R, Tucson, AZ 85721; telephone: (520) 621-1716. Email: cederburg@email.arizona.edu.
Publisher Copyright:
© The Author 2017.
PY - 2018/2/1
Y1 - 2018/2/1
N2 - 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. (JEL C11, G11, G12)
AB - 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. (JEL C11, G11, G12)
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U2 - 10.1093/rfs/hhx079
DO - 10.1093/rfs/hhx079
M3 - Article
AN - SCOPUS:85046403694
SN - 0893-9454
VL - 31
SP - 556
EP - 594
JO - Review of Financial Studies
JF - Review of Financial Studies
IS - 2
ER -