How Much Does the Stock Market Risk Decline with the Investment Horizon? A Cross-Country Comparison

Weperformacross-countrycomparisonofstockmarketrisk.Stockmarket riskisdefinedasthestandarddeviationofcumulativestockmarketreturns. WemodelstockmarketreturnsinaVAR(1)systemjointlywithbondreturns and a set of predictive variables. Our results provide evidence of a strong negative horizon effect for US stock market returns and a weak negative horizon effect for Germany and France. When an open economy VAR(1) is considered, we find that stock market risk increases for the United States and Germany, while the evidence for France is mixe