The Cross‐Section of Volatility and Expected Returns

TLDR

The study examines how aggregate volatility risk is priced across stock returns. Stocks highly sensitive to aggregate volatility and those with high idiosyncratic volatility both exhibit abysmally low average returns, a pattern not explained by aggregate volatility exposure or standard factors such as size, book‑to‑market, momentum, or liquidity.

Abstract

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. Stocks with high idiosyncratic volatility relative to the Fama and French (1993, Journal of Financial Economics 25, 2349) 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.