Asset Volatility

85 Pages Posted: 1 Dec 2013 Last revised: 5 Sep 2017

See all articles by Maria M. Correia

Maria M. Correia

London School of Economics and Political Science

Johnny Kang

BlackRock, Inc

Scott A. Richardson

AQR Capital Management, LLC; London Business School

Date Written: July 7, 2017

Abstract

We examine whether fundamental measures of volatility are incremental to market based measures of volatility in (i) predicting bankruptcies (out of sample), (ii) explaining cross-sectional variation in credit spreads, and (iii) explaining future credit excess returns. Our fundamental measures of volatility include (i) historical volatility in profitability, margins, turnover, operating income growth, and sales growth, (ii) dispersion in analyst forecasts of future earnings, and (iii) quantile regression forecasts of the interquartile range of the distribution of profitability. We find robust evidence that these fundamental measures of volatility improve out of sample forecasts of bankruptcy and are useful in explaining cross-sectional variation in credit spreads. This suggests that an analysis of credit risk can be enhanced with a detailed analysis of fundamental information. As a test case of the benefit of volatility forecasting, we document an improved ability to forecast future credit excess returns, particularly when using fundamental measures of volatility.

Keywords: credit spreads, volatility, bankruptcy, default

JEL Classification: G12, G14, M41

Suggested Citation

Correia, Maria M. and Kang, Johnny and Richardson, Scott Anthony, Asset Volatility (July 7, 2017). Available at SSRN: https://ssrn.com/abstract=2361686 or http://dx.doi.org/10.2139/ssrn.2361686

Maria M. Correia

London School of Economics and Political Science ( email )

Houghton St
London, London WC2A 2AE
United Kingdom

Johnny Kang

BlackRock, Inc ( email )

400 Howard Street
San Francisco, CA 94010
United States

Scott Anthony Richardson (Contact Author)

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

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