A Holistic Approach to the Predictive Power of Expected Volatility

54 Pages Posted: 6 Feb 2012 Last revised: 1 Feb 2016

See all articles by Gherben van der Holst

Gherben van der Holst

Duyfken Trading Knowledge

Remco C. J. Zwinkels

Vrije Universiteit Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Date Written: February 3, 2012

Abstract

This paper studies the predictive power of expected volatility in the cross-section of expected stock returns. Evidence indicates that total and idiosyncratic volatility levels and volatility innovations have predictive power in the cross-section of expected excess stock returns. The results show that volatility levels are positively and volatility innovations are negatively related to future stock returns. EWMA, GARCH and TGARCH volatility measures have the largest predictive power, whereas the predictive power of realized and implied volatility measures is mixed. Additionally, we control the results for the short-term reversal effect and illiquidity, but neither of those effects helps explaining the predictive power of expected volatility.

Keywords: Cross-sectional returns, idiosyncratic volatility, GARCH, implied volatility

JEL Classification: C53, G11, G12, G17

Suggested Citation

van der Holst, Gherben and Zwinkels, Remco C.J., A Holistic Approach to the Predictive Power of Expected Volatility (February 3, 2012). Journal of Financial Research, Vol. 38, No. 4, 2015. Available at SSRN: https://ssrn.com/abstract=1998860 or http://dx.doi.org/10.2139/ssrn.1998860

Gherben Van der Holst

Duyfken Trading Knowledge ( email )

Amsterdam
Netherlands

Remco C.J. Zwinkels (Contact Author)

Vrije Universiteit Amsterdam ( email )

De Boelelaan 1105
Amsterdam, NL-1081HV
Netherlands
+31 20 59 85220 (Phone)

HOME PAGE: http://research.vu.nl/en/persons/remco-zwinkels

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

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