Volatility Expectations and Returns
We provide evidence that agents have slow-moving beliefs about stock market volatility that lead to initial underreaction to volatility shocks followed by delayed overreaction. These dynamics are mirrored in the VIX and variance risk premiums which reflect investor expectations about volatility and are also supported in surveys and in firm-level option prices. We embed these expectations into an asset pricing model and find that the model can account for a number of stylized facts about market returns and return volatility which are difficult to reconcile, including a weak, or even negative, risk-return tradeoff.
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Copy CitationLars A. Lochstoer and Tyler Muir, "Volatility Expectations and Returns," NBER Working Paper 28102 (2020), https://doi.org/10.3386/w28102.Download Citation
Published Versions
LARS A. LOCHSTOER & TYLER MUIR, 2022. "Volatility Expectations and Returns," The Journal of Finance, vol 77(2), pages 1055-1096.
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