High Expected-Volatility Thresholds, Factor Premia, and Intermediary Asset Pricing

90 Pages Posted: 30 Sep 2016 Last revised: 1 Dec 2018

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: November 23, 2018

Abstract

Over 1960 to 2017, we show that the premia from holding high-beta stocks (versus low-beta stocks) and small-cap stocks (versus large-cap stocks) are earned solely following times when the expected stock-market volatility breaches an approximate top-quintile threshold. Such time-variation in risk premia fits with the nonlinear risk-return relation suggested by the IAP literature. Further, fitting with IAP implications, we find that high-beta stocks and small-cap stocks (relative to low-beta and large-cap stocks): (1) earn even a higher premia following periods that meet both top-quintile expected-volatility and bottom-quintile intermediary-capital-ratio thresholds; (2) earn a higher premia following a top-quintile expected-volatility threshold even in non-recessionary times; (3) have a stronger negative sensitivity to illiquidity shocks; and (4) have greater fundamental-valuation ambiguity. Conversely, for the Fama-French HML, RMW, and CMA factors, none of these patterns are comparably evident. In sum, our study provides compelling evidence that IAP influences have an important role in understanding beta- and size-based risk premia, but not HML, RMW, and CMA risk premia.

Keywords: Factor risk premia, intermediary asset pricing, illiquidity risk, intertemporal risk-return tradeoff

JEL Classification: G11, G12

Suggested Citation

Bansal, Naresh and Connolly, Robert A. and Stivers, Chris T., High Expected-Volatility Thresholds, Factor Premia, and Intermediary Asset Pricing (November 23, 2018). 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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