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

47 Pages Posted: 21 Jul 2006

Date Written: July 2006

Abstract

We decompose the time series of equity market risk into short- and long-run volatility components. Both components have negative and highly significant prices of risk in the cross section of equity returns. A three-factor model with the market return and the two volatility components compares favorably to benchmark models. We show that the short-run component captures market skewness risk, while the long-run component captures business cycle risk. Furthermore, short-run volatility is the more important cross-sectional risk factor, even though its average risk premium is smaller than the premium of the long-run component.

Keywords: asset pricing, stochastic volatility, cross section of returns

JEL Classification: G10, G12

Suggested Citation

Adrian, Tobias and Rosenberg, Joshua V., Stock Returns and Volatility: Pricing the Short-Run and Long-Run Components of Market Risk (July 2006). FRB of New York Staff Report No. 254, Available at SSRN: https://ssrn.com/abstract=918479 or http://dx.doi.org/10.2139/ssrn.918479

Tobias Adrian (Contact Author)

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

HOME PAGE: http://www.tobiasadrian.com

Joshua V. Rosenberg

Independent ( email )

United States

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
1,138
Abstract Views
4,484
Rank
34,946
PlumX Metrics