Working Paper: NBER ID: w10852
Authors: Andrew Ang; Robert J. Hodrick; Yuhang Xing; Xiaoyan Zhang
Abstract: We examine the pricing of aggregate volatility risk in the cross-section of stock returns. Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns. In addition, we find that stocks with high idiosyncratic volatility relative to the Fama and French (1993) model have abysmally low average returns. This phenomenon cannot be explained by exposure to aggregate volatility risk. Size, book-to-market, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility risk or for the low average returns of stocks with high idiosyncratic volatility.
Keywords: volatility; expected returns; asset pricing
JEL Codes: G12; G13
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| aggregate volatility (E10) | expected stock returns (G17) |
| innovations in aggregate volatility (O49) | expected stock returns (G17) |
| high sensitivity to innovations in aggregate volatility (C58) | low average returns (G19) |
| idiosyncratic volatility (G19) | expected stock returns (G17) |