Aggregate Volatility Risk and the Cross-Section of Stock Returns: Australian Evidence

Abstract

This study examines the relation between aggregate volatility risk and the cross-section of stock returns in Australia. We use a stock’s sensitivity to innovations in the ASX200 implied volatility (VIX) as a proxy for aggregate volatility risk. Consistent with theoretical predictions, aggregate volatility risk is negatively related to the cross-section of stock returns only when market volatility is rising. The asymmetric volatility effect is persistent throughout the sample period and is robust after controlling for size, book-to-market, momentum, and liquidity issues. There is some evidence that aggregate volatility risk is a priced factor, especially in months with increasing market volatility.

Keywords: Aggregate volatility risk, cross-sectional return, asset pricing test, implied volatility (VIX), anomaly

JEL Classification: G12, G13, G14