Changing Risk-Return Profiles

RePEc Short ID: pcr107
ORCID iD: 0000-0002-7958-1818

Crump, Richard K.; Everaert, Miro; Giannone, Domenico; Hundtofte , Sean

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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;