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The Cross‐Section of Volatility and Expected Returns
Author(s) -
ANG ANDREW,
HODRICK ROBERT J.,
XING YUHANG,
ZHANG XIAOYAN
Publication year - 2006
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.2006.00836.x
Subject(s) - volatility (finance) , volatility risk premium , economics , volatility risk , systematic risk , volatility swap , stock (firearms) , financial economics , capital asset pricing model , forward volatility , econometrics , volatility smile , implied volatility , market liquidity , monetary economics , mechanical engineering , engineering
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.