Section iii focuses more specifically on extreme returns and idiosyncratic volatility. The crosssection of volatility and expected returns rice university. We examine the pricing of aggregate volatility risk in the cross. Asset pricing we examine the pricing of aggregate volatility risk in the cross section of stock returns. Past studies using options have estimated a negative price for market volatility. The role of investor attention and risk preferences. Idiosyncratic risk and the crosssection of expected stock. We examine how volatility risk, both at the aggregate market and individual stock level, is priced in the cross section of expected stock returns. National bureau of economic research we examine the pricing of aggregate volatility risk in the crosssection of. The crosssection of volatility and expected returns nber. We also show that the negative correlation between return and total volatility or expected idiosyncratic variance or expected idiosyncratic volatility strengthens as leverage increases or credit rating.
It is well known that the volatility of stock returns varies over time. Good volatility, bad volatility, and the cross section of. In the first phase, their goal was to determine the price of aggregate volatility risk in the crosssection of expected. This phenomenon cannot be explained by exposure to aggregate volatility risk. Consumption volatility and the crosssection of stock returns. Section v provides further robustness checks, and section vi concludes. If aggregate volatility is a risk factor that is orthogonal to existing risk factors, the sensitivity of stocks.
High idiosyncratic volatility and low returns columbia business. We employ mixed data sampling midas to estimate a portfolios. In the first phase, their goal was to determine the price of aggregate volatility risk in the crosssection of expected stock. Andrew ang, robert hodrick, yuhang xing and xiaoyan zhang. Two prominent examples are the favoritelongshot bias in. Our results are closely related to the recent work by amaya, christo ersen, jacobs, and vasquez acjv 2016, and their nding of signi cant spreads in the weekly returns. The crosssection of volatility and expected returns request pdf.
The crosssection of volatility and expected returns by. Stocks as lotteries and the crosssection of expected. The crosssection of volatility and expected returns digest. National bureau of economic research we examine the pricing of aggregate volatility risk in the cross section of stock returns. This paper examines the crosssectional relation between idiosyncratic volatility and expected stock returns. This paper examines the cross sectional relation between idiosyncratic volatility and expected stock returns. Section iv presents results for skewness and extreme returns. Crosssection of volatility and expected returns 261 of assets that may have different exposures to aggregate volatility and hence different average returns. Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility. Citeseerx the crosssection of volatility and expected returns. Size, book tomarket, momentum, and liquidity effects cannot account for either the low average returns earned by stocks. The crosssection of volatility and expected returns andrew ang, robert j.
However, in portfolios simultaneously sorted on both cash. The empirical results support the theoretical prediction of dispersion being priced in the crosssection of stock returns. A simple model of capital market equilibrium with incomplete information. We examine the pricing of aggregate volatility risk in the cross section of stock returns. Section ii describes the data and empirical strategy, section iii conducts a number of asset pricing tests in the crosssection of stock and bond returns. November 2007 abstract in this paper, i show that conditional volatility of consumption accounts for di. The second goal of the paper is to examine the cross. The crosssection of volatility and expected returns 2006. We find evidence that implied volatility overestimates realized volatility for lowbeta stocks, small caps, lowmarketto book stocks, and stocks with no momentum and vice versa. The cross section of cashflow volatility and expected stock.
In the crosssectional regressions, the product of marketto book and idiosyncratic volatility is negative and strongly signi cant. Associate professor of finance department of economics and finance. Media coverage and the crosssection of stock returns. Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns. Media coverage and the crosssection of stock returns 2027 volatility with respect to the famafrench 1993 threefactor model exhibit abysmally low returns. The results indicate that i the data frequency used to estimate idiosyncratic. Information quality and the crosssection of expected returns.
The crosssection of volatility and expected returns article in the journal of finance 611. Crosssection of option returns and volatility sciencedirect. Each author name for a columbia business school faculty member is linked to a faculty research. The results indicate that i the data frequency used to estimate idiosyncratic volatility, ii the weighting scheme used to compute average portfolio returns, iii the breakpoints utilized to sort stocks into quintile portfolios, and iv using a screen for size, price, and liquidity. Abstract we examine the pricing of aggregate volatility risk in the cross. The shape of the volatility smirk has significant crosssectional predictive power for future equity returns. However, the use of options to estimate price does not control for crosssectional risk factors, such as book value, size, momentum, or liquidity factors used in previous studies. Journal of finance 42, 483510 predict a positive relation. The crosssection of volatility and expected returns by andrew. Extreme positive returns and cross section of expected returns a. The shape of the volatility smirk has significant cross sectional predictive power for future equity returns.
Stocks with high idiosyncratic volatility relative to the fama and french 1993, journal of financial economics 25, 2349 model have abysmally low average returns. We employ mixed data sampling midas to estimate a portfolios conditional beta with the market and with alternative risk factors and innovations to wellknown macroeconomic variables. The crosssection of volatility and expected returns ebook. Stocks that have past high sensitivities to innovations in aggregate volatility have low average returns. Each author name for a columbia business school faculty member is linked to a faculty research page, which lists additional publications by that faculty member. The cross section of volatility and expected returns article in the journal of finance 611. This paper explores the crosssectional variation of expected returns for a large cross section of industry and size book tomarket portfolios. Extreme positive returns and crosssection of expected returns. The volatility of crosssectional stock returns is known to vary over time. Abstract we examine the pricing of aggregate volatility risk in the crosssection of stock returns.
Over forty years ago, one of the first tests of the capital asset pricing model capm found that the market beta was a significant explanator of the crosssection of expected returns. The crosssection of expected stock returns eugene f. The crosssection of expected stock returns 3 available at the time i. Adding the product ips the signs of idiosyncratic volatility and marketto book. The crosssection of expected stock returns 429 also possible, however, that beme just captures the unraveling regression toward the mean of irrational market whims about the prospects of firms. Stocks exhibiting the steepest smirks in their traded options underperform stocks with the least. Whatever the underlying economic causes, our main result is straightfor ward. There is also evidence that investors have a preference for lotterylike assets, i. Financial intermediaries and the crosssection of asset. Section of volatility and expected returns, journal of finance, american finance association, vol. Idiosyncratic volatility, growth options, and the cross. Section of volatility and expected returns ang 2006.
These results are robust to controls for size, booktomarket, momentum. Consistent with theory, we find that stocks with high sensitivities to. The crosssection of volatility and expected returns 2005. No 10852, nber working papers from national bureau of economic research, inc. In the first phase, their goal was to determine the price of aggregate volatility risk in the cross section of expected stock returns, while in the second phase, they studied the cross sectional relationship between idiosyncratic volatility and expected. Size, booktomarket, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility. Cross section of expected returns and extreme returns. I also run crosssectional regressions of rm returns on lagged rm characteristics. The cross section of volatility and expected returns andrew ang, robert j.
The cross section of expected returns with midas betas. Jan 20, 2006 this phenomenon cannot be explained by exposure to aggregate volatility risk. We find that a zerocost trading strategy that is long short in the portfolio with a large positive negative difference between these two volatility measures produces an. Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low.
Stocks exhibiting the steepest smirks in their traded options underperform stocks with the least pronounced volatility smirks in their options by 10. The cross section of volatility and expected returns. The crosssection of volatility and expected returns. We study the crosssection of stock option returns by sorting stocks on the difference between historical realized volatility and atthemoney implied volatility. Over forty years ago, one of the first tests of the capital asset pricing model capm found that the market beta was a significant explanator of the cross section of expected returns. Crosssectional volatility and stock returns sage journals. The crosssection of volatility and expected returns ideasrepec. For the cross section of option returns, a variety of volatility based characteristics are documented as being important determinants e. Cross section of volatility and expected returns 261 of assets that may have different exposures to aggregate volatility and hence different average returns. Good volatility, bad volatility, and the cross section of stock returns article in journal of financial and quantitative analysis january 2019 with 172 reads how we measure reads. Implied and realized volatility in the crosssection of. Idiosyncratic volatility and the cross section of expected. In the first phase, their goal was to determine the price of aggregate volatility risk in the cross section of expected stock returns, while in the second phase, they studied the cross sectional relationship between idiosyncratic volatility and expected returns.
Section v provides further robustness checks, and section vi. We find that media coverage is positively related to both analyst forecast dispersion and idiosyncratic volatility, after controlling. Size, booktomarket, momentum, and liquidity effects cannot. Idiosyncratic volatility, growth options, and the crosssection of returns alexander barinov georgy chabakauri. Citeseerx document details isaac councill, lee giles, pradeep teregowda. However, the use of options to estimate price does not control for crosssectional risk factors, such as book.
We study the cross section of stock option returns by sorting stocks on the difference between historical realized volatility and atthemoney implied volatility. Volatilityofvolatility and the crosssection of option returns. Section iv analyzes the properties of the leverage. Idiosyncratic volatility, growth options, and the crosssection of.
Volatilityofvolatility and the crosssection of option. The cross section of cashflow volatility and expected. Consumption volatility and the crosssection of stock. The negative relation between idiosyncratic volatility and expected returns, or idiosyncratic volatility puzzle, exists only for stocks with high max, implying that the puzzle may arise from the overpayment. Extreme positive returns and the cross section of expected returns a. Size, booktomarket, momentum, and liquidity effects cannot account for either the low average returns. Request pdf the crosssection of volatility and expected returns we. We also show that the negative correlation between return and. While considerable research has examined the timeseries relation between the volatility of the market and the expected return on the market see, among others, campbell and hentschel 1992 and glosten, jagannathan, and runkle 1993, the question of how aggregate volatility affects the cross section of expected stock. Stocks as lotteries and the crosssection of expected returns turan g. We examine the pricing of aggregate volatility risk in the crosssection of stock returns. Abstract we examine the pricing of aggregate volatility risk in the cross section of stock returns.
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