Does equity risk decrease in the long run? Some evidence from French data
BERNAY A.
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Abstract
A recent debate has sparked controversy on the relevance of accounting for market inefficiencies in the context of Solvency II (Lukassen and Pröpper 2007, Gollier 2007). The present article confirms long term mean reversion of French stock returns and shows the variation of asset relative risk which should induce a rational investor to own more stocks on the long run. Therefore the optimal asset allocation depends on the time horizon of the investor as the relative risk of stocks over bonds or bills progressively declines. One possible interpretation of this result is that equity is a better hedge against inflation risk, however empirical evidence of this latter assertion remains a matter of debate. Finally we highlight the issue of including this empirical evidence in the appraisal of insurer’s market risk.
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