Average Stock Variance and Market Returns: Evidence of Time-Varying Predictability at the Daily Frequency

Posted: 21 May 2019

See all articles by Huafeng (Jason) Chen

Huafeng (Jason) Chen

Fudan University - Fanhai International School of Finance (FISF)

Hernan Ortiz-Molina

University of British Columbia (UBC) - Sauder School of Business

Siliang Zhang

University of British Columbia (UBC)

Date Written: June 7, 2010

Abstract

We develop a daily measure of average stock variance and study whether it can predict market returns one day ahead. Using a time-invariant prediction model we find a robust predictive relation between these variables which cannot be used to profitably time the market. A closer look reveals that the strength and even the direction of the predictive relation vary significantly over short periods of time. Moreover, a simple timing strategy that exploits this variation over time significantly outperforms the market buy-and-hold strategy in terms of the mean-variance tradeoff. The evidence shows that predictability is stronger during business-cycle contractions and that our timing strategy is profitable because it avoids losses during bad times. Last, parameter breaks occur very frequently over short periods of time, and not only when the economy switches the phase of the business cycle. Our results suggest that idiosyncratic risk matters in asset pricing and that its effect is time varying.

JEL Classification: G12

Suggested Citation

Chen, Huafeng (Jason) and Ortiz-Molina, Hernan and Zhang, Siliang, Average Stock Variance and Market Returns: Evidence of Time-Varying Predictability at the Daily Frequency (June 7, 2010). Journal of Portfolio Management, Forthcoming, https://doi.org/10.3905/jpm.2011.37.4.086, Available at SSRN: https://ssrn.com/abstract=1647890

Huafeng (Jason) Chen (Contact Author)

Fudan University - Fanhai International School of Finance (FISF) ( email )

220 Handan Road
Shanghai, 200433
China

Hernan Ortiz-Molina

University of British Columbia (UBC) - Sauder School of Business ( email )

2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
604-822-6095 (Phone)
604-822-4695 (Fax)

Siliang Zhang

University of British Columbia (UBC) ( email )

2329 West Mall
Vancouver, British Columbia BC V6T 1Z4
Canada

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
3,094
PlumX Metrics