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Time Varying Volatility and the Cross-Section of Equity Returns

Author

Listed:
  • Chris Brooks

    () (ICMA Centre, University of Reading)

  • Xiafei Li

    (Nottingham University Business School)

  • Joelle Miffre

    (EDHEC, Nice, France)

Abstract

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.

Suggested Citation

  • Chris Brooks & Xiafei Li & Joelle Miffre, 2009. "Time Varying Volatility and the Cross-Section of Equity Returns," ICMA Centre Discussion Papers in Finance icma-dp2009-01, Henley Business School, Reading University.
  • Handle: RePEc:rdg:icmadp:icma-dp2009-01
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    File URL: http://www.icmacentre.ac.uk/files/icma_centre_dp_200901_17.pdf
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    cross-sectional variation in stock returns; CAPM; GARCH-M; conditional volatility; risk premium.;

    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

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