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Fear and the Fama‐French Factors
Author(s) -
Durand Robert B.,
Lim Dominic,
Zumwalt J. Kenton
Publication year - 2011
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2011.01147.x
Subject(s) - volatility (finance) , economics , risk premium , financial economics , value premium , econometrics , momentum (technical analysis) , capital asset pricing model , monetary economics
Investors’ expectations of market volatility, captured by the VIX (the Chicago Board Options Exchange's volatility index, also known as the “investor fear gauge”), affects the expected returns of US equities. Changes in the VIX drive variations in the expected returns of the factors included in the Fama and French three‐factor model augmented with a momentum factor. The market risk premium (R m – R f ) and the value premium (HML) are especially sensitive to changes in the VIX. An increase in expected volatility is associated with flights to quality and increases in estimated required returns.