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On investing in the long run when stock returns are mean-reverting

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  • Antoine Giannetti

Abstract

How risky is it to invest in the stock market in the long run? Under the random walk hypothesis for stock returns, it has been shown that risk is increasing with the investment time horizon. Using the insights of variance ratios literature, this paper shows that, if stock returns are mean-reverting in the long run, then such a conclusion may be reversed. As a practical consequence, portfolio insurance cost would decrease with time horizon.

Suggested Citation

  • Antoine Giannetti, 2005. "On investing in the long run when stock returns are mean-reverting," Applied Financial Economics, Taylor & Francis Journals, vol. 15(14), pages 1037-1040.
    • Handle: RePEc:taf:apfiec:v:15:y:2005:i:14:p:1037-1040
    DOI: 10.1080/09603100500120373
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    References listed on IDEAS

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    1. Lo, Andrew W & Wang, Jiang, 1995. "Implementing Option Pricing Models When Asset Returns Are Predictable," Journal of Finance, American Finance Association, vol. 50(1), pages 87-129, March.
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    3. Merton, Robert C., 1971. "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Elsevier, vol. 3(4), pages 373-413, December.
    4. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    5. Merton, Robert C, 1981. "On Market Timing and Investment Performance. I. An Equilibrium Theory of Value for Market Forecasts," The Journal of Business, University of Chicago Press, vol. 54(3), pages 363-406, July.
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