The Memory of Stock Return Volatility: Asset Pricing Implications

66 Pages Posted: 22 Nov 2017 Last revised: 18 Jan 2019

See all articles by Duc Binh Benno Nguyen

Duc Binh Benno Nguyen

Leibniz Universität Hannover - Faculty of Economics and Management

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Philipp Sibbertsen

University of Hannover

Date Written: November 18, 2018

Abstract

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

Nguyen, Duc Binh Benno and Prokopczuk, Marcel and Sibbertsen, Philipp, The Memory of Stock Return Volatility: Asset Pricing Implications (November 18, 2018). Journal of Financial Markets, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3074550 or http://dx.doi.org/10.2139/ssrn.3074550

Duc Binh Benno Nguyen (Contact Author)

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

Philipp Sibbertsen

University of Hannover ( email )

Welfengarten 1
D-30167 Hannover, 30167
Germany

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