Stocks as lotteries and the crosssection of expected returns turan g. High idiosyncratic volatility and low returns columbia business. Both volatility measures are expected to increase in unfavorable economic times. We examine the pricing of aggregate volatility risk in the crosssection of stock returns. Consumption volatility and the crosssection of stock returns. Funding liquidity risk and the crosssection of mbs returns. Crosssection of option returns and volatility sciencedirect. 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. Analyst coverage and two volatility puzzles in the cross section of returns we examine a stylized version of millers 1977 hypothesis as the explanation of the puzzling ndings of both chordia. Apt or factor model indicates that aggregate volatility should also be priced in the cross section of. We also examine the crosssectional implications of volatility risks for returns on portfolios hold more than one period. A new factor model consisting of the market factor, an investment factor, and a returnonequity factor is a good start to understanding the crosssection of expected stock returns. October 2006 abstract this paper presents a new pattern in the crosssection of expected stock returns.
Pdf the crosssection of volatility and expected returns. However, in portfolios simultaneously sorted on both cashflow and return volatilities, and in cross sectional. Consistent with theory, we find that stocks with high. A voluminous literature has studied the cross section of stock returns, but papers that examine the cross. The crosssection of volatility and expected returns by andrew. The crosssection of volatility and expected returns request pdf. The crosssection of volatility and expected returns andrew ang, robert j. Idiosyncratic volatility matters for the crosssection of returns in more ways than one. April 2008 preliminary and incomplete abstract motivated by. Abstract we examine the pricing of aggregate volatility risk in the cross section of stock returns. On the other hand, ang, hodrick, xing, and zhang 2006 find that, in the crosssection of stocks, high idiosyncratic.
Analyst coverage and the cross sectional relation between. School of accounting and finance, and center for advanced studies in finance, university of waterloo, waterloo. The crosssection of expected stock returns eugene f. If the volatility of the market return is a systematic risk factor, an. The shape of the volatility smirk has significant crosssectional predictive power for future equity returns. Analyst coverage and two volatility puzzles in the cross. Organization capital and the crosssection of expected returns andrea l. Analyst coverage and the cross sectional relation between returns and volatility the january e. The crosssection of volatility and expected returns nber. In the first phase, their goal was to determine the price of aggregate volatility risk in the crosssection of expected stock returns, while in.
Request pdf idiosyncratic volatility and the cross section of expected returns this paper examines the crosssectional relation between. The role of crosssectional volatility in appraising. The cross section of volatility and expected returns. Crosssection of volatility and expected returns 261 of assets that may have different exposures to aggregate volatility and hence different average returns. Stocks that have past high sensitivities to innovations in aggregate volatility have low average returns. Through formal central limit arguments, we show that the crosssectional variance of stock.
Thus, controlling for volatilityrelated option mispricing exacerbates instead of explains our results. Information quality and the crosssection of expected returns. Andrew ang, robert hodrick, yuhang xing and xiaoyan zhang. September 20 abstract the paper shows that the value e ect and the idiosyncratic volatility discount ang et al. Amit goyal goizueta business school emory university alessio saretto the krannert school purdue university march 2008 abstract we study the cross. Idiosyncratic risk and the crosssection of expected stock. The purpose of this paper is to clarify the existence and signi. Hence, stocks with different sensitivities to innovations in aggregate volatility should have different expected returns. Section of volatility and expected returns ang 2006. However, we interpret firm characteristics in a broader sense. Option returns and the crosssectional predictability of. Organization capital and the crosssection of expected returns. Idiosyncratic volatility, its expected variation, and the crosssection of stock returns nicole branger hendrik hulsbusc h t.
Crosssectional volatility and stock returns sage journals. The crosssection of volatility and expected returns ideasrepec. Stocks that covary positively with them provide a hedge, and. The cross section of volatility and expected returns article in the journal of finance 611. We examine the pricing of aggregate volatility risk in the cross. Similarly, a stock with iv above the crosssectional average and above its own twelvemonth. If aggregate volatility is a risk factor that is orthogonal to existing risk factors, the sensitivity of stocks. If the volatility of the market return is a systematic risk factor, the. The results indicate that i the data frequency used to estimate idiosyncratic volatility, ii the. Idiosyncratic volatility and the cross section of expected returns volume 43 issue 1 turan g. The crosssection of volatility and expected returns by.
Section of volatility and expected returns econpapers. The cross section of cashflow volatility and expected. Stocks exhibiting the steepest smirks in their traded options underperform stocks with the least. Eisfeldt and dimitris papanikolaou abstract organization capital is a production factor that is embodied in the rms key. We examine how volatility risk, both at the aggregate market and individual stock level, is priced in the crosssection of expected stock returns. Idiosyncratic volatility, growth options, and the crosssection of returns this version. Idiosyncratic volatility and the cross section of expected. Second, the ratio of booktomarket equity and size are found to be the most significant variables that can account for the crosssection of. The crosssection of stock return and volatility hongchao han abstract there has been increasing research on the crosssectional relation between stock return and volatility. The crosssection of volatility and expected returns, 2006. Idiosyncratic volatility, growth options, and the crosssection of returns alexander barinov simon school of business terry school of business. Cross section of volatility and expected returns 261 of assets that may have different exposures to aggregate volatility and hence different average returns. Consumption volatility and the crosssection of stock. Market frictions, price delay, and the crosssection of.
Johnson 2004 also uses the idea that the beta of a call option is negatively related to volatility. We examine how volatility risk, both at the aggregate market and individual stock level, is priced in the cross section of expected stock returns. With the exception of nasdaq stocks, aggregatevolatility risk continues to be. The crosssection of volatility and expected returns article in the journal of finance 611. Idiosyncratic volatility matters for the crosssection of. Ball 1978 argues that ep is a catchall proxy for unnamed factors in expected returns. To address these concerns, we introduce a new form of volatility index, the crosssectional volatility index. This negative relation provides indirect evidence of a positive relation between expected risk premiums and volatility. Apt or factor model indicates that aggregate volatility should also be priced in the crosssection of. By andrew ang, robert hodrick, yuhang xing and xiaoyan zhang. Idiosyncratic volatility, its expected variation, and the. If a certain firm characteristic is found to be correlated with the crosssection of expected returns, a longshort portfolio can usually be. The second goal of the paper is to examine the cross. Singlestock timeseries return volatility one stock, many return timeperiods.
This paper examines the crosssectional relation between idiosyncratic volatility and expected stock returns. Asset pricing we examine the pricing of aggregate volatility risk in the cross section of stock returns. The cross section of volatility and expected returns andrew ang, robert j. Seasonality in the crosssection of stock returns steven l.
Carey school of business arizona state university june 24, 2010 abstract i present a simple model to show that if agents face binding. The crosssection of volatility and expected returns. Abstract this article reexamines the relationship between idiosyncratic volatility and the crosssection of stock. Idiosyncratic volatility and the cross section of expected returns. We study the crosssection of stock option returns by sorting stocks on the difference between historical realized volatility and atthemoney implied volatility. Eisfeldty ucla dimitris papanikolaouz northwestern university july 2011 abstract organization capital is a production factor. Cross section of option returns and idiosyncratic stock. The crosssection of volatility and expected returns rice university. Stochastic idiosyncratic volatility, portfolio constraints.