Unknown Unknowns: Uncertainty About Risk and Stock Returns
Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)
Sjoerd van Bekkum
Bart van der Grient
Robeco Asset Management - Quantitative Strategies
October 23, 2014
AFA 2013 San Diego Meetings Paper
Stocks with high uncertainty about risk, as measured by the volatility of volatility (vol-of-vol), robustly underperform stocks with low uncertainty about risk by 10 percent per year. This vol-of-vol effect is distinct from (combinations of) at least twenty previously documented return predictors, survives many robustness checks, and holds in the U.S. and across European stock markets. We empirically explore the pricing mechanism behind the vol-of-vol effect. The evidence points towards preference-based explanations, and points away from various alternative explanations. Collectively, our results show that uncertainty about risk is highly relevant for stock prices.
Number of Pages in PDF File: 76
Keywords: asset pricing, stock returns, uncertainty
JEL Classification: G10, G12, D80
Date posted: March 20, 2012 ; Last revised: October 24, 2014
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