The Nonlinear High-Volatility Phenomenon in Beta and Size Equity Premia
104 Pages Posted: 30 Sep 2016 Last revised: 3 Jul 2019
Date Written: July 1, 2019
Over 1960 to 2017, we show that a positive risk premium from holding high-beta stocks (versus low-beta stocks) and small-cap stocks (versus large-cap stocks) is reliably earned only after the expected stock-market volatility breaches an approximate top-quintile threshold. Strong high-beta and small-cap performance is evident over months t+1 to t+6 following a volatility-threshold breach in month t-1. This nonlinear risk-return phenomenon is not evident for the Fama-French HML, RMW, and CMA factors. We present additional time-series and cross-sectional evidence that suggests habit-consumption utility, intermediary asset pricing, and stochastic volatility asset pricing are likely contributing channels.
Keywords: Factor risk premia, nonlinear risk-return relation, intermediary asset pricing, illiquidity risk
JEL Classification: G11, G12
Suggested Citation: Suggested Citation