The Memory of Stock Return Volatility: Asset Pricing Implications
66 Pages Posted: 22 Nov 2017 Last revised: 18 Jan 2019
Date Written: November 18, 2018
We examine long memory volatility in the cross-section of stock returns. We show that long memory volatility is widespread in the United States and that the degree of memory can be related to firm characteristics, such as market capitalization, book-to-market ratio, prior performance, and price jumps. Long memory volatility is negatively priced in the cross-section. Buying stocks with shorter memory and selling stocks with longer memory in volatility generates significant excess returns of 1.71% per annum. Consistent with theory, we find that the volatility of stocks with longer memory is more predictable than stocks with shorter memory. This makes the latter more uncertain, which is compensated for with higher average returns.
Keywords: Asset Pricing; Long Memory; Persistence; Volatility
JEL Classification: C22; G12
Suggested Citation: Suggested Citation