Long-Horizon Losses in Stocks, Bonds, and Bills
114 Pages Posted: 18 Nov 2021 Last revised: 11 Jan 2024
Date Written: August 9, 2023
Abstract
We study long-horizon returns of domestic stocks, international stocks, bonds, and bills with a focus on periods with real losses in each asset class. Our dataset construction and estimation methods mitigate survivor bias and offer novel, quantitative evidence on the joint distribution of asset class returns. We find that (i) 30-year real loss probabilities in domestic markets are high for stocks (13%), bonds (27%), and bills (37%); (ii) exchange-rate fluctuations offset local inflation to produce a lower loss probability for international stocks (4%); and (iii) equity losses are driven by negative real dividend growth attributable to declining profit shares.
Keywords: Long-horizon returns, loss probability, survivor bias, easy data bias
JEL Classification: C15, D31, G10, G11, G12, G15, G17, N20
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