Time-Varying Volatility and the Cross-Section of Equity Returns

A vast literature has documented the value premium and the small firm effect as pervasive stylized facts in empirical asset pricing and yet research has been largely unable to provide entirely convincing explanations of why these phenomena exist.

Author(s):

Chris Brooks

Professor of Finance, ICMA Centre, University of Reading (UK)

Xiafei Li

Ph.D. student, Cass Business School, City University (UK)

Joelle Miffre

Associate Professor of Finance, EDHEC Business School

This paper demonstrates that the cross-sectional variation in returns between portfolios sorted by size and book-to-market value is significantly and positively related to the conditional volatility of those portfolios. We show that the explanatory power of the portfolios' sensitivities to conditional volatility for the cross-section of returns is in addition to that embodied in the sensitivities to market risk, macroeconomic, book-to-market and market capitalization factors.
Pdf
Time-Varying Volatility and the Cross-Section of Equity Returns...
(1.69 MB)
Type: Working paper
Date: le 09/03/2009
Research Cluster : Finance

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