Bratislava Economic Seminar: Katarína Lučivjanská (4.12.2017)

Monday 4.12.2017 at 15:00, Lecture room C

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Katarína Lučivjanská (Pavol Jozef Šafárik University in Košice):
Are stocks riskier over the long run? Taking cues from economic theory

Abstract:
We study the riskiness of stocks over long horizons from the perspectives of Bayesian investors who employ economic theory, speci fically  the long-run risk, habit formation, or prospect theory models, to form prior beliefs about return dynamics. We find that incorporating prior information from the habit formation or prospect theory models reinforces beliefs in mean reversion and inferences that stocks are safe over long horizons. In contrast, investors with long-run risk priors conclude that stocks display relatively little mean reversion and are actually riskier for long-horizon investors. Guidance from economic theory can be important because the sample evidence is relatively uninformative.

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