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The joint cross-sectional variation of equity returns and volatilities

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  • González-Urteaga, Ana
  • Rubio, Gonzalo

Abstract

This paper analyzes the determinants of the simultaneous cross-sectional variation of return and volatility risk premia. Independently of the model specification employed, the estimated risk premium associated with the default premium beta is always positive and statistically different from zero. Moreover, the risk premium of the market volatility risk premium beta is negative and statistically significant. However, both risk factors are priced economically and statistically differently in the volatility and return segments of the market. On average, common factors in both segments explain 90% of the variability of volatility risk premium portfolios, but only 65% of the variability of equity return portfolios.

Suggested Citation

  • González-Urteaga, Ana & Rubio, Gonzalo, 2017. "The joint cross-sectional variation of equity returns and volatilities," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 17-34.
    • Handle: RePEc:eee:jbfina:v:75:y:2017:i:c:p:17-34
    DOI: 10.1016/j.jbankfin.2016.11.013
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    More about this item

    Keywords

    Return risk premia; Volatility risk premia; Linear factor models; Default premium; Return and volatility market segmentation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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