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Volatility measurement, the ERP, and downside risk over long time horizons

  • Posted by: ,  Chief Executive
  • 14 August 2018
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5 Blockbuster Papers

Eugene Fama and Kenneth French just published a paper in the Financial Analysts Journal.  Let me say that again.  EUGENE FAMA and KENNETH FRENCH just published a paper in the Financial Analysts Journal.  'Volatility Lessons' is a methodical examination of volatility within sample distributions of the U.S. equity risk premium over various time periods.

To mark this momentous occasion, we've reached deep into the Savvy Investor archives and uncovered 4 additional blockbuster papers on the ERP, volatility, and downside risk over long time horizons.

volatility ERP lightning risk

Volatility Lessons (Fama and French, 2018)
Due to the high volatility of returns for stocks, investors shouldn't draw strong inferences about expected returns from realized returns over 3, 5, or 10-year periods. Investors acting on noisy evidence should reconsider their approach.

The Divergence of High- and Low-Frequency estimation
This paper, authored by Will Kinlaw and David Turkington of State Street Associates and Mark Kritzman of MIT Sloan School, provides findings that are important to asset allocators looking at long-term asset allocation goals. High-frequency estimation, according to the paper, does not predict behavior reliably in the long-term, even if no sampling error is present. Investors should, when constructing portfolios for long horizons, include both high- and low-frequency returns bases in their risk estimates.

Time Diversification Redux: Why Volatility varies with the holding period (Research Affiliates, 2017)
The definition of what constitutes risk can become complex and mysterious.  In this paper, Research Affiliates attempts to shed some light on risk measurement and volatility over various time horizons. 

Taxonomy of Global Risk, Uncertainty, and Volatility Measures (US Federal Reserve, 2017)
Researchers at the U.S. Fed review literature examining measures of risk, uncertainty, and volatility in order to catalog them by how they are collected, how they are computed, and their specific subject-matter.

Equity Risk Premiums: Determinants, Estimation and Implications (Damodaran, 2018)
Professor Aswath Damodaran of NYU looks at different ways of estimating equity risk premiums (ERP). The article includes discussions of risk aversion, macroeconomic risk, and uncertainty as determinants of the ERP.

 

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