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

77 Pages Posted: 30 Sep 2016 Last revised: 4 Mar 2020

See all articles by Naresh Bansal

Naresh Bansal

Saint Louis University - Department of Finance

Robert A. Connolly

Miami Herbert Business School - Department of Finance

Chris T. Stivers

University of Louisville

Date Written: March 3, 2020

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. The high conditional average returns with this nonlinear risk-return phenomenon are persistently evident over months t+1 to t+6 following a volatility-threshold breach in month t-1. Conversely, this nonlinear risk-return phenomenon is not comparably evident for the Fama-French HML, RMW, and CMA factors. We present additional 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, stock-market volatility, 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 (March 3, 2020). 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

Miami Herbert Business School - Department of Finance ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States

HOME PAGE: http://https://drbobconnolly.com/

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)

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
306
Abstract Views
1,921
rank
114,418
PlumX Metrics