Report

Changing Risk-Return Profiles


Abstract: We show that realized volatility in market returns and financial sector stock returns have strong predictive content for the future distribution of market returns. This is a robust feature of the last century of U.S. data and, most importantly, can be exploited in real time. Current realized volatility has the most information content on the uncertainty of future returns, whereas it has only limited content about the location of the future return distribution. When volatility is low, the predicted distribution of returns is less dispersed and probabilistic forecasts are sharper.

Keywords: stock returns; realized volatility; density forecasts; optimal pools;

JEL Classification: C22; G17; G18;

Access Documents

File(s): File format is text/html https://www.newyorkfed.org/research/staff_reports/sr850.html
Description: Summary

File(s): File format is application/pdf https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr850.pdf
Description: Full text

Authors

Bibliographic Information

Provider: Federal Reserve Bank of New York

Part of Series: Staff Reports

Publication Date: 2018-06-01

Number: 850

Note: Revised August 2023.