The Nonlinear High-Volatility Phenomenon in Beta and Size Equity Premia

104 Pages Posted: 30 Sep 2016 Last revised: 3 Jul 2019

See all articles by Naresh Bansal

Naresh Bansal

Saint Louis University - Department of Finance

Robert A. Connolly

University of North Carolina (UNC) at Chapel Hill - Finance Area

Chris T. Stivers

University of Louisville

Date Written: July 1, 2019

Abstract

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

Bansal, Naresh and Connolly, Robert A. and Stivers, Chris T., The Nonlinear High-Volatility Phenomenon in Beta and Size Equity Premia (July 1, 2019). 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 )

John Cook School of Business
St. Louis, MO 63108
United States
314-977-7204 (Phone)

Robert A. Connolly

University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )

Kenan-Flagler Business School
Campus Box 3490
Chapel Hill, NC 27599-3490
United States
919-962-0053 (Phone)
919-962-5539 (Fax)

HOME PAGE: http://itr.bschool.unc.edu/faculty/connolly

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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