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Expected Stock Market Returns and Volatility: Three Decades Later

Author

Listed:
  • Haimanot Kassa
  • Feifei Wang
  • Yan Xuemin (Sterling)

Abstract

We replicate the findings of French, Schwert, and Stambaugh (FSS, 1987) almost exactly. Consistent with FSS, we find modest evidence of a positive relation between market risk premium and the expected market volatility and strong evidence of a negative relation between market excess returns and the unexpected change in market volatility during 1928 to 1984. These results persist during 1985 to 2018 and are robust to alternative data and model specifications. We extend the analysis to 23 developed countries and find qualitatively similar results. We show that the risk-return tradeoff is stronger during expansions than during recessions and does not vary significantly with investor sentiment.

Suggested Citation

  • Haimanot Kassa & Feifei Wang & Yan Xuemin (Sterling), 2023. "Expected Stock Market Returns and Volatility: Three Decades Later," Critical Finance Review, now publishers, vol. 12(1-4), pages 271-307, August.
    • Handle: RePEc:now:jnlcfr:104.00000132
    DOI: 10.1561/104.00000132
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    More about this item

    Keywords

    Expected market return; Volatility; Risk-return tradeoff; EGARCH;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • 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
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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