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

Stock Returns and Volatility: Pricing the Short‐Run and Long‐Run Components of Market Risk 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. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png The Journal of Finance Wiley

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

The Journal of Finance , Volume 63 (6) – Dec 1, 2008

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References (103)

Publisher
Wiley
Copyright
© American Finance Association
ISSN
0022-1082
eISSN
1540-6261
DOI
10.1111/j.1540-6261.2008.01419.x
Publisher site
See Article on Publisher Site

Abstract

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.

Journal

The Journal of FinanceWiley

Published: Dec 1, 2008

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