Profitability Anomaly and Aggregate Volatility Risk

54 Pages Posted: 29 Nov 2015 Last revised: 28 Jul 2022

See all articles by Alexander Barinov

Alexander Barinov

University of California Riverside

Date Written: July 27, 2022


Firms with lower profitability have lower expected returns because such firms perform better than expected when market volatility increases. The better-than-expected performance arises because unprofitable firms are distressed and volatile, their equity resembles a call option on the assets, and call options value increases with volatility, all else fixed. Consistent with this hypothesis, the profitability anomaly and its exposure to aggregate volatility risk are stronger for distressed and volatile firms; for such firms, aggregate volatility risk explains roughly half of the profitability anomaly, while in single sorts on profitability about 70% of the anomaly is explained.

Keywords: profitability, aggregate volatility risk, distress, default, idiosyncratic volatility, anomalies

JEL Classification: G11, G12, E44, M41

Suggested Citation

Barinov, Alexander, Profitability Anomaly and Aggregate Volatility Risk (July 27, 2022). Journal of Financial Markets, Forthcoming, Available at SSRN: or

Alexander Barinov (Contact Author)

University of California Riverside ( email )

900 University Ave.
Anderson Hall
Riverside, CA 92521
United States
585-698-7726 (Phone)


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