The Cross-Section of Volatility and Expected Returns: Then and Now

51 Pages Posted: 26 Sep 2019

See all articles by Andrew L. Detzel

Andrew L. Detzel

University of Denver - Daniels College of Business

Jefferson Duarte

Rice University

Avraham Kamara

University of Washington - Michael G. Foster School of Business

Stephan Siegel

University of Washington - Michael G. Foster School of Business; CESifo

Celine Sun

Wealthfront, Inc.

Date Written: May 14, 2019

Abstract

We successfully replicate the main results of Ang, Hodrick, Xing, and Zhang (2006): Aggregate-volatility risk and idiosyncratic volatility (IV) are each priced in the cross-section of stock returns from 1963 to 2000. We also examine the pricing of volatility outside the original time period and under more recent asset-pricing models. With the exception of NASDAQ stocks, aggregate-volatility risk continues to be priced in the years following the Ang et al. (2006) sample period, and none of the more recent asset-pricing models we consider consistently accounts for the pricing of aggregate-volatility risk. The difference in abnormal returns between stocks with high and low IV decreases but remains significant out-of-sample. More recent asset-pricing models do not resolve the IV anomaly for the Ang et al. (2006) sample, but the four-factor model of Stambaugh and Yuan (2017) and the six-factor model of Barillas and Shanken (2018) resolve the anomaly out-of-sample and over the extended period of 1967 to 2016. Finally, both models eliminate the arbitrage asymmetry that Stambaugh, Yu, and Yuan (2015) propose as an explanation of the IV anomaly.

Keywords: Volatility risk, idiosyncratic risk, cross-section of returns, limits to arbitrage

JEL Classification: G11, G12, G14

Suggested Citation

Detzel, Andrew L. and Duarte, Jefferson and Kamara, Avraham and Siegel, Stephan and Sun, Celine, The Cross-Section of Volatility and Expected Returns: Then and Now (May 14, 2019). Available at SSRN: https://ssrn.com/abstract=3455609 or http://dx.doi.org/10.2139/ssrn.3455609

Andrew L. Detzel (Contact Author)

University of Denver - Daniels College of Business ( email )

2101 S. University Blvd
Denver, CO 80208
United States

HOME PAGE: http://portfolio.du.edu/adetzel

Jefferson Duarte

Rice University ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States
713.3486137 (Phone)

Avraham Kamara

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States
206-543-0652 (Phone)
206-221-6856 (Fax)

Stephan Siegel

University of Washington - Michael G. Foster School of Business ( email )

Box 353200
Seattle, WA 98195-3200
United States

HOME PAGE: http://faculty.washington.edu/ss1110/

CESifo ( email )

Poschinger Str. 5
Munich, DE-81679
Germany

Celine Sun

Wealthfront, Inc.

900 Middlefield Rd
Redwood City, CA 94063
United States

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