Journal
REVIEW OF FINANCIAL STUDIES
Volume 31, Issue 2, Pages 556-594Publisher
OXFORD UNIV PRESS INC
DOI: 10.1093/rfs/hhx079
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Funding
- Israel Science Foundation [233/14]
- Slovak Scientific Grant Agency (VEGA grant) [1/0344/14]
- Slovak Research and Development Agency [APVV-14-0357]
- Austrian Science Fund (FWF) [W 1001] Funding Source: researchfish
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We study whether stocks are riskier or safer in the long run from the perspective of Bayesian investors who employ the long-run risk, habit formation, or prospect theory models to form prior beliefs about return dynamics. Economic theory delivers important guidance for long-run investment opportunities. Specifically, incorporating prior information from the habit formation or prospect theory models reinforces beliefs in mean reversion and inferences that stocks are safer over longer horizons. Conversely, investors with long-run risk priors perceive weaker mean reversion and riskier equities. Model-based information is particularly important for inferences about uncertainty in the dividend growth component of returns.
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