Fear and the Fama-French Factors

29 Pages Posted: 26 Feb 2007  

Robert B. B. Durand

Curtin University of Technology - School of Economics and Finance - Department of Finance and Banking

Dominic Lim

University of Western Australia - Department of Accounting and Finance

J. Kenton Zumwalt

Colorado State University, Fort Collins - Department of Finance & Real Estate

Date Written: February 2007

Abstract

Investors' expectations of market volatility, captured by the VIX (the Chicago Board Options Exchange's volatility index - also known as the "investor fear gauge"), affects the expected returns of US equities in two ways. Firstly, the VIX is a priced-factor in a five-factor model of daily returns (where Fama and French's three-factor model is augmented with a momentum factor and the VIX). Secondly, changes in the VIX drive variations in the expected returns of the other factors included in this model of returns, notably the market risk-premium (Rm-Rf) and the value-premium (HML).

Keywords: Asset-pricing, market volatility, VIX

JEL Classification: G12

Suggested Citation

Durand, Robert B. B. and Lim, Dominic and Zumwalt, J. Kenton, Fear and the Fama-French Factors (February 2007). Available at SSRN: https://ssrn.com/abstract=965587 or http://dx.doi.org/10.2139/ssrn.965587

Robert B. B. Durand (Contact Author)

Curtin University of Technology - School of Economics and Finance - Department of Finance and Banking ( email )

Bentley 6102 WA
Australia

HOME PAGE: http://tiny.cc/y85rh

Dominic Lim

University of Western Australia - Department of Accounting and Finance ( email )

School of Business
35 Stirling Highway
Crawley, Western Australia 6009
Australia

J. Kenton Zumwalt

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

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