Aggregate Volatility Risk: Explaining the Small Growth Anomaly and the New Issues Puzzle
47 Pages Posted: 24 Mar 2008 Last revised: 29 Sep 2015
Date Written: May 1, 2012
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: Suggested Citation