Profitability Anomaly and Aggregate Volatility Risk

65 Pages Posted: 29 Nov 2015 Last revised: 25 Jan 2020

See all articles by Alexander Barinov

Alexander Barinov

University of California Riverside

Date Written: January 23, 2020


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 is stronger for distressed and volatile firms, and aggregate volatility risk can explain this regularity.

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 (January 23, 2020). 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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