Aggregate Volatility Risk: Explaining the Small Growth Anomaly and the New Issues Puzzle

47 Pages Posted: 24 Mar 2008 Last revised: 29 Sep 2015

See all articles by Alexander Barinov

Alexander Barinov

University of California Riverside

Date Written: May 1, 2012

Abstract

The paper shows that small growth firms earn low expected returns because they are a hedge against expected aggregate volatility. Consistent with that, the ICAPM with the aggregate volatility risk factor can explain the small growth anomaly, as well as the new issues puzzle and the cumulative issuance puzzle. The key mechanism is that, all else equal, growth options become less sensitive to the underlying asset value and more valuable as idiosyncratic volatility goes up. Idiosyncratic volatility usually increases together with aggregate volatility, that is, in recessions.

Keywords: aggregate volatility risk, new issues puzzle, small growth anomaly, size effect, growth options, value premium, anomalies

JEL Classification: G12, G13, G32, E44

Suggested Citation

Barinov, Alexander, Aggregate Volatility Risk: Explaining the Small Growth Anomaly and the New Issues Puzzle (May 1, 2012). Journal of Corporate Finance, Vol. 18, No. 4, 2012. Available at SSRN: https://ssrn.com/abstract=1030479 or http://dx.doi.org/10.2139/ssrn.1030479

Alexander Barinov (Contact Author)

University of California Riverside ( email )

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Riverside, CA 92521
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585-698-7726 (Phone)

HOME PAGE: http://faculty.ucr.edu/~abarinov/

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