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Title:Stock returns and volatility: Pricing the short-run and long-run components of market risk PDF Logo
Authors:Adrian, Tobias
Rosenberg, Joshua
Issue Date:2006
Series/Report no.:Staff Report, Federal Reserve Bank of New York 254
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 closely to business cycle risk. Furthermore, a three-factor pricing model with the market return and the two volatility components compares favorably to benchmark models.
Subjects:asset pricing, stochastic volatility, cross section of returns
JEL:G10
G12
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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