Beta and Size Equity Premia following a High-VIX Threshold

Journal of Futures Markets, forthcoming.

47 Pages Posted: 30 Sep 2016 Last revised: 19 May 2022

See all articles by Naresh Bansal

Naresh Bansal

Saint Louis University - Department of Finance

Robert A. Connolly

University of Florida

Chris T. Stivers

University of Louisville

Date Written: May 18, 2022

Abstract

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 a high threshold at about the 80th percentile. When exceeding this threshold at month t-1, then sizable positive average returns from beta and size exposure are persistently evident over months t+1 to t+6; otherwise the premia are near zero. Conversely, we find no comparable threshold behavior for the Fama-French HML, RMW, and CMA factors. Our investigation suggests several economic channels as likely contributors behind these threshold risk-return findings.

Keywords: factor risk premia, nonlinear risk-return relation, stock-market volatility, intermediary asset pricing, illiquidity risk

JEL Classification: G11, G12

Suggested Citation

Bansal, Naresh and Connolly, Robert A. and Stivers, Chris T., Beta and Size Equity Premia following a High-VIX Threshold (May 18, 2022). Journal of Futures Markets, forthcoming., Available at SSRN: https://ssrn.com/abstract=2845610 or http://dx.doi.org/10.2139/ssrn.2845610

Naresh Bansal

Saint Louis University - Department of Finance ( email )

Richard A. Chaifetz School of Business
St. Louis, MO 63108
United States
314-977-7204 (Phone)

Robert A. Connolly

University of Florida ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

Chris T. Stivers (Contact Author)

University of Louisville ( email )

Finance Dept., College of Business
University of Louisville
Louisville, KY 40292
United States
502-852-4829 (Phone)

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