Stock Returns and Volatility: Another Look

Abstract:     
Most empirical work examining the intertemporal mean-variance relationship in stock returns has tended to use relatively simple specifications of the mean and especially of the conditional variance. We augment the information set to include economic variables that other researchers have found to be important and use GARCH-M models to explore the relation between volatility and expected stock returns. We find that the additional variables have little impact on the conditional variance and that any intertemporal relationship between volatility and stock returns is weak or unstable. Our results signal the need for theoretical models of the intertemporal volatility-return relationship, and call for further studies of the determinants of the conditional variance of stock returns.

Number of Pages in PDF File: 29

Keywords: stock returns, volatility, risk, expected returns

JEL Classification: D4, G0, G1, M5, C5

working papers series