Unknown Unknowns: Uncertainty About Risk and Stock Returns

76 Pages Posted: 20 Mar 2012 Last revised: 24 Oct 2014

Guido Baltussen

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE)

Sjoerd van Bekkum

Erasmus University

Bart van der Grient

Robeco Asset Management - Quantitative Strategies

Date Written: October 23, 2014

Abstract

Stocks with high uncertainty about risk, as measured by the volatility of volatility (vol-of-vol), robustly underperform stocks with low uncertainty about risk by 10 percent per year. This vol-of-vol effect is distinct from (combinations of) at least twenty previously documented return predictors, survives many robustness checks, and holds in the U.S. and across European stock markets. We empirically explore the pricing mechanism behind the vol-of-vol effect. The evidence points towards preference-based explanations, and points away from various alternative explanations. Collectively, our results show that uncertainty about risk is highly relevant for stock prices.

Keywords: asset pricing, stock returns, uncertainty

JEL Classification: G10, G12, D80

Suggested Citation

Baltussen, Guido and van Bekkum, Sjoerd and van der Grient, Bart, Unknown Unknowns: Uncertainty About Risk and Stock Returns (October 23, 2014). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2023066 or http://dx.doi.org/10.2139/ssrn.2023066

Guido Baltussen

Erasmus University Rotterdam (EUR) - Erasmus School of Economics (ESE) ( email )

P.O. Box 1738
3000 DR Rotterdam, NL 3062 PA
Netherlands

Sjoerd Van Bekkum (Contact Author)

Erasmus University ( email )

P.O. Box 1738
Rotterdam, NL 3062 PA
Netherlands

Bart Van der Grient

Robeco Asset Management - Quantitative Strategies ( email )

P.O. Box 973
3000 AZ Rotterdam
Netherlands

HOME PAGE: http://www.robeco.com

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