58 Pages Posted: 14 Nov 2021 Last revised: 24 Jun 2022
Date Written: November 10, 2021
Standard asset pricing models with stochastic volatility predict a robust positive relationship between past realized volatility and future expected returns. Empirical work typically finds this relationship to be negative. We develop an asset pricing model where stock market volatility dynamics are driven by information. We show that information-driven volatility induces a negative correlation between past realized volatility and future expected returns. We provide empirical evidence for the unique implications of the information-driven volatility channel and demonstrate that our model can quantitatively replicate the evidence.
Keywords: Information, Return Volatility, Macroeconomic Announcements, Generalized Risk Sensitivity
JEL Classification: D83, D84, G11, G12, G14
Suggested Citation: Suggested Citation