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Time Varying Volatility and the Cross-Section of Equity Returns

  • Chris Brooks

    ()

    (ICMA Centre, University of Reading)

  • Xiafei Li

    (Nottingham University Business School)

  • Joelle Miffre

    (EDHEC, Nice, France)

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. 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.

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Paper provided by Henley Business School, Reading University in its series ICMA Centre Discussion Papers in Finance with number icma-dp2009-01.

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Length: 36 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:rdg:icmadp:icma-dp2009-01
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Web page: http://www.henley.reading.ac.uk/

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  17. Martin Lettau & Sydney Ludvigson, 1999. "Resurrecting the (C)CAPM: a cross-sectional test when risk premia are time-varying," Staff Reports 93, Federal Reserve Bank of New York.
  18. Banz, Rolf W., 1981. "The relationship between return and market value of common stocks," Journal of Financial Economics, Elsevier, vol. 9(1), pages 3-18, March.
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