Cross-Section of Equity Returns: Stock Market Volatility and Priced Factors

Sohn, Bumjean

doi:10.2139/ssrn.1364834

Cited by 8 publications

(6 citation statements)

References 62 publications

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“…Petkova (2006) finds that variation in HML and SMB can be modeled using variables capturing economic expectations. As mentioned above, Sohn (2009) confirms that macroeconomic factors are directly related to volatility. Thus, the bulk of the evidence indicates that HML reflects investors’ expectations of economic well‐being in the future.…”

Section: The Factorssupporting

confidence: 68%

“…Petkova (2006) finds that the variation in SMB (and HML) can be captured using a number of state variables that describe current investment opportunities, consumption preferences, and the future state of the economy. Sohn (2009) reports that volatility is related to both trading and macroeconomic factors and suggests these factors are priced because they provide information about future volatility. Finally, Campbell, Hilscher, and Szilagyi (2008) argue that both SMB and HML capture, to some extent, a degree of default risk.…”

Section: The Factorsmentioning

confidence: 99%

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Fear and the Fama‐French Factors

Durand

Lim

Zumwalt

2011

Financial Management

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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 (Rm– Rf) 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.

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Section: The Factorssupporting

confidence: 68%

Section: The Factorsmentioning

confidence: 99%

Fear and the Fama‐French Factors

Durand

Lim

Zumwalt

2011

Financial Management

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Section: B the Size Factor (Smb)mentioning

confidence: 99%

Fear and the Fama-French Factors

2007

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“…Boguth and Kuehn () and Tedongap () show the evidence of a negative market price of risk and negative equity exposure to consumption volatility risk in the cross section of equity returns. Bali and Zhou (), Han and Zhou (), and Todorov and Tauchen (2010) provide additional evidence of negative exposure of equity returns to alternative measures of volatility risks and Sohn () shows empirically that the market price of volatility risk is negative.…”

mentioning

confidence: 99%

Volatility, the Macroeconomy, and Asset Prices

Bansal¹,

Kiku²,

Shaliastovich³

et al. 2014

The Journal of Finance

299

121

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How important are volatility fluctuations for asset prices and the macroeconomy? We find that an increase in macroeconomic volatility is associated with an increase in discount rates and a decline in consumption. We develop a framework in which cash flow, discount rate, and volatility risks determine risk premia and show that volatility plays a significant role in explaining the joint dynamics of returns to human capital and equity. Volatility risk carries a sizable positive risk premium and helps account for the cross section of expected returns. Our evidence demonstrates that volatility is important for understanding expected returns and macroeconomic fluctuations. ABSTRACTWe show that volatility movements have first-order implications for consumption dynamics and asset prices. Volatility news affects the stochastic discount factor and carries a separate risk premium. In the data, volatility risks are persistent and are strongly correlated with discount-rate news. This evidence has important implications for the return on aggregate wealth and the cross-sectional differences in risk premia. Estimation of our volatility risks based model yields an economically plausible positive correlation between the return to human capital and equity, while this correlation is implausibly negative when volatility risk is ignored. Our model setup implies a dynamics capital asset pricing model (DCAPM) which underscores the importance of volatility risk in addition to cash-flow and discount-rate risks. We show that our DCAPM accounts for the level and dispersion of risk premia across book-to-market and size sorted portfolios, and that equity portfolios carry positive volatility-risk premia.

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Cross-Section of Equity Returns: Stock Market Volatility and Priced Factors

Cited by 8 publications

References 62 publications

Fear and the Fama‐French Factors

Fear and the Fama‐French Factors

Fear and the Fama-French Factors

Volatility, the Macroeconomy, and Asset Prices

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