Stocks are more volatile over long horizons than over short horizons from an investor’s perspective. This perspective recognizes that observable predictors imperfectly deliver the conditional expected return and that parameters are uncertain, even with two centuries of data. Stocks are often considered less volatile over long horizons due to mean reversion induced by predictability. However, mean reversion’s negative contribution to long-horizon variance is more than offset by the combined effects of various uncertainties faced by the investor. Using a predictive system to capture these uncertainties, we find 30-year variance is 21 to 53 percent higher per year than 1-year variance.

Stocks are more volatile over long horizons than over short horizons from an investor’s perspective. This perspective recognizes that observable predictors imperfectly deliver the conditional expected return and that parameters are uncertain, even with two centuries of data. Stocks are often considered less volatile over long horizons due to mean reversion induced by predictability. However, mean reversion’s negative contribution to long-horizon variance is more than offset by the combined effects of various uncertainties faced by the investor. Using a predictive system to capture these uncertainties, we find 30-year variance is 21 to 53 percent higher per year than 1-year variance.

This paper presents the optimal strategic asset allocation for investors seeking to hedge inflation risk. Using a vector-autoregressive model, we investigate the optimal choice for an investor with a fixed target real return at different horizons, with shortfall probability constraint. We show that the strategic allocation differs sharply across regimes. In a volatile macroeconomic environment, inflation-linked bonds, equities, commodities and real estate play an essential role. In a stable environment (“Great Moderation”), nominal bonds play the most significant role, with equities and commodities. An ambitious investor in terms of required real return should have a larger weighting in risky assets, especially commodities.

Conditional maximum Sharpe ratios implied by fully flexible four-factor and five-factor Gaussian term structure models are astronomically high. Estimation of term structure models subject to a constraint on their Sharpe ratios uncovers properties that hold for a wide range of Sharpe ratios. These robust properties include (a) an inverse relation between a bond’s maturity and its average Sharpe ratio; (b) between 15 and 20 percent of annual excess returns to bonds are predictable; and (c) variations in expected excess bond returns are driven by two factors. These factors operate at different frequencies. Nonrobust features include the mean level of the term structure. Unconstrained models imply that investors anticipated much of the decline of interest rates in the 1990s. Constrained models disagree. Voice 410-516-8828,

This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in this paper are those of the authors and are not necessarily reflective of views of the Peterson Institute, the Federal Reserve Bank of New York, or the Federal Reserve System. Any errors or omissions are the

Having weathered the worst crisis in terms of length and amplitude since the Second World War, investors may have to cope with one of the potential outcomes of the subprime meltdown: the threat of a surge in the cost of living. The accumulation of multiple factors