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Persistence of ex-ante volatility and the cross-section of stock returns

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  • Simlai, Prodosh

Abstract

We suggest a new measure of total ex-ante volatility (EAV) in stock returns, which includes traditional non-market (or idiosyncratic) risk and the unexpected component of market return. We find that the portfolio-level EAV measure exhibits strong predictive power for the cross-section of average returns during the post-1963 period. We demonstrate that (1) the persistence of EAV gives rise to economically significant spread in returns between value and growth stocks, and (2) the cross-sectional dispersion in stock returns is positively related to the estimated value of EAV. The benefit of the EAV measure is that it is countercyclical and contains relevant information about the time-variation in value premium.

Suggested Citation

  • Simlai, Prodosh, 2014. "Persistence of ex-ante volatility and the cross-section of stock returns," International Review of Financial Analysis, Elsevier, vol. 33(C), pages 253-261.
    • Handle: RePEc:eee:finana:v:33:y:2014:i:c:p:253-261
    DOI: 10.1016/j.irfa.2014.03.002
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    More about this item

    Keywords

    Value premium; Ex-ante volatility; Bivariate EGARCH model; Cross-sectional returns;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods

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