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Volatility lessons

Volatility lessons

01-08-2018 | From the field

In this paper Eugene Fama and Kenneth French look at the importance of volatility over longer investment horizons.

  • David Blitz
    David
    Blitz
    Head of Quant Research

They begin by noting that historically there has been a sizable equity risk premium, and also sizable premiums of small and value stocks over the market. They go on to show that as the return horizon increases, the probability of obtaining a positive market, size or value premium increases as well.

However, the bad news is that even if future expected premiums match high past averages, the probabilities of negative realized premiums are still substantial at commonly used investment horizons of three to five years. Even for 10- and 20-year periods these probabilities are found to remain nontrivial.

Our take-away from this paper1 is that even if a factor premium is negative over the next twenty years, this cannot be taken as conclusive evidence that the factor premium is gone. In other words, it is basically impossible to prove that a factor premium has disappeared. This probably feels uncomfortable to many investors, but such is the nature of statistics.

1Fama & French, “Volatility Lessons”, SSRN working paper, no. 3081101, 2017.

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Blijf op de hoogte van kwantitatieve inzichten
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From the field
From the field

Onze onderzoekers publiceren veel whitepapers die zijn gebaseerd op hun eigen empirische onderzoek, maar ze kijken ook naar kwantitatief onderzoek dat door anderen is gedaan. David Blitz, hoofd Quant Equities Research, vertelt over opvallende externe papers.

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