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51
The CrossSection of Volatility and Expected Returns
 Journal of Finance
, 2006
"... We especially thank an anonymous referee and Rob Stambaugh, the editor, for helpful suggestions that greatly improved the article. Andrew Ang and Bob Hodrick both acknowledge support from the NSF. ..."
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Cited by 267 (9 self)
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We especially thank an anonymous referee and Rob Stambaugh, the editor, for helpful suggestions that greatly improved the article. Andrew Ang and Bob Hodrick both acknowledge support from the NSF.
Estimating the intertemporal riskreturn tradeoff using the implied cost of capital
, 2006
"... We reexamine the timeseries relation between the conditional mean and variance of stock market returns. To proxy for the conditional mean return, we use the implied cost of capital, computed using analyst forecasts. The usefulness of this proxy is shown in simulations. In empirical analysis, we con ..."
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Cited by 57 (3 self)
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We reexamine the timeseries relation between the conditional mean and variance of stock market returns. To proxy for the conditional mean return, we use the implied cost of capital, computed using analyst forecasts. The usefulness of this proxy is shown in simulations. In empirical analysis, we construct the time series of the implied cost of capital for the G7 countries. We find strong support for a positive intertemporal meanvariance relation at both the country level and the world market level. Some of our evidence is consistent with international integration of the G7 financial markets.
Stock returns and volatility: Pricing the shortrun and longrun components of market risk
 Journal of Finance
, 2008
"... This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New Yo ..."
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Cited by 53 (1 self)
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This paper presents preliminary findings and is being distributed to economists and other interested readers solely to stimulate discussion and elicit comments. The views expressed in the paper are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.
On the dynamic relation between returns and idiosyncratic volatility, working paper
, 2004
"... The dynamic effect of idiosyncratic risk on market returns has been debated recently. Previous studies examine the effect based on a regression of excess returns on onelagged volatility. We claim this approach provides only a partial, limited picture of the dynamic effect of idiosyncratic risk that ..."
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Cited by 19 (1 self)
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The dynamic effect of idiosyncratic risk on market returns has been debated recently. Previous studies examine the effect based on a regression of excess returns on onelagged volatility. We claim this approach provides only a partial, limited picture of the dynamic effect of idiosyncratic risk that tends to be persistent over time. By correcting for the serial correlation in idiosyncratic volatility, we find a significant positive effect of idiosyncratic volatility. Unlike previous studies, this finding is robust with respect to various firm size portfolios, sample periods, and measures of the idiosyncratic risk. We further find that idiosyncratic volatility affects stock market returns beyond its effect through revisions in the present value of future cash flows and expected discount rates, and the idiosyncratic volatility contains fundamental factors as well as nonfundamentals. This suggests mispricing of the stock market in its response to idiosyncratic risk, and there may be some measurement problems with idiosyncratic risk, which may be related to nondiversifiable risk.
Is there an intertemporal relation between downside risk and expected returns
 Journal of Financial and Quantitative Analysis
, 2009
"... This paper examines the intertemporal relation between downside risk and expected stock returns. Value at Risk (VaR), expected shortfall, and tail risk are used as measures of downside risk to determine the existence and significance of a riskreturn tradeoff. We find a positive and significant rela ..."
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Cited by 12 (0 self)
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This paper examines the intertemporal relation between downside risk and expected stock returns. Value at Risk (VaR), expected shortfall, and tail risk are used as measures of downside risk to determine the existence and significance of a riskreturn tradeoff. We find a positive and significant relation between downside risk and the portfolio returns on NYSE/AMEX/Nasdaq stocks. VaR remains a superior measure of risk when compared with the traditional risk measures. These results are robust across different stock market indices, different measures of downside risk, loss probability levels, and after controlling for macroeconomic variables and volatility over different holding periods as originally proposed by Harrison and Zhang (1999). I.
Measuring the TimeVarying RiskReturn Relation from the CrossSection of Equity Returns.” Working Paper
, 2007
"... We use the structure imposed by Mertons (1973) ICAPM to obtain monthly estimates of the marketlevel riskreturn relationship from the crosssection of equity returns. Our econometric approach sidesteps the speci
cation of timeseries models for the conditional risk premium and volatility of the mar ..."
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Cited by 8 (0 self)
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We use the structure imposed by Mertons (1973) ICAPM to obtain monthly estimates of the marketlevel riskreturn relationship from the crosssection of equity returns. Our econometric approach sidesteps the speci
cation of timeseries models for the conditional risk premium and volatility of the market portfolio. We show that the riskreturn relation is mostly positive but varies considerably over time. It covaries positively with countercyclical state variables. The relationship between the risk premium and hedgerelated risk also exhibits strong timevariation, which supports the empirical evidence that aggregate risk aversion varies over time. Finally, the ICAPMs two components of the risk premium show distinctly di¤erent cyclical properties. The volatility component exhibits a countercyclical pattern whereas the hedging component is less related to the business cycle and falls below zero for extended periods. This suggests the market serves an important hedging role for longterm investors. We thank Jules van Binsbergen, seminar participats at the Vienna Symposium on Asset Management, and an anonymous referee for helpful comments.
LONGRUN RISKRETURN TRADEOFFS
, 2007
"... Excess market returns are correlated with past market variance. This dependence is statistically mild at short horizons (thereby leading to a hardtodetect riskreturn tradeoff, as in the existing literature) but increases with the horizon and is strong in the long run (i.e., between 6 and 10 years ..."
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Cited by 8 (1 self)
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Excess market returns are correlated with past market variance. This dependence is statistically mild at short horizons (thereby leading to a hardtodetect riskreturn tradeoff, as in the existing literature) but increases with the horizon and is strong in the long run (i.e., between 6 and 10 years). From an econometric standpoint, we …nd that the longrun predictive power of past market variance is robust to the statistical properties of longhorizon stockreturn predictive regressions. From an economic standpoint, we show that, when conditioning on past market variance, conditional versions of the traditional CAPM and consumptionCAPM yield considerably smaller crosssectional pricing errors than their unconditional counterparts.
2009): Equilibrium in securities markets with heterogeneous investors and unspanned income risk, Working paper, http://papers.ssrn.com/sol3/papers.cfm? abstract_id=1364237
"... Abstract: We provide the first closedform solution in the literature for the equilibrium riskfree rate and the equilibrium stock price in a continuoustime economy with heterogeneous investor preferences and unspanned income risk. We show that lowering the fraction of income risk spanned by the m ..."
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Cited by 6 (4 self)
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Abstract: We provide the first closedform solution in the literature for the equilibrium riskfree rate and the equilibrium stock price in a continuoustime economy with heterogeneous investor preferences and unspanned income risk. We show that lowering the fraction of income risk spanned by the market produces a lower equilibrium riskfree rate and a lower stock market Sharpe ratio, partly due to changes in the aggregate consumption dynamics. If we fix the aggregate consumption dynamics, the Sharpe ratio is the same as in an otherwise identical representative agent economy in which all risks are spanned, whereas the riskfree rate (and the expected stock return) is lower in the economy with unspanned income risk due to an increased demand for precautionary savings. The reduction in the riskfree rate is highest when the more riskaverse investors face the largest unspanned income risk. In numerical examples with reasonable parameters, the riskfree rate is reduced by several percentage points. Our closedform solution hinges on negative exponential utility and normally distributed
Understaning the Puzzling RiskReturn Relationship for Housing
 Review of Financial Studies
, 2013
"... Standard theory predicts a positive relationship between risk and return, yet recent data show that housing returns vary positively with risk in some markets but negatively in others. This paper rationalizes these crossmarket differences in the riskreturn relationship for housing, and in so doing, ..."
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Cited by 4 (1 self)
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Standard theory predicts a positive relationship between risk and return, yet recent data show that housing returns vary positively with risk in some markets but negatively in others. This paper rationalizes these crossmarket differences in the riskreturn relationship for housing, and in so doing, explains the puzzling negative relationship. The paper shows that when the current house provides a hedge against the risk associated with the future housing consumption, households are willing to accept a lower return to compensate for risk, thus weakening the positive riskreturn relationship. Further, in markets with less elastic housing supply and a growing population, hedging incentives can be sufficiently strong to make the relationship negative. The empirical analysis confirms these predictions, suggesting that hedging incentives, housing supply, and urban growth are indeed central to understanding the riskreturn relationship for housing. (JEL G12, R30) The riskreturn relationship is fundamental to finance. While a substantial literature focuses on the riskreturn relationship for stocks, much less attention has been paid to housing. This omission is surprising: housing represents twothirds of a typicalAmerican household’s portfolio (Goetzmann 1993; Brueckner
Pricing kernels with coskewness and volatility risk. Charles A. Dice Center Working Paper No. 2008–25 and Fisher College of Business Working Paper No. 200803023, 2008b. Available online at SSRN: http://ssrn.com/abstract
"... I investigate a pricing kernel in which coskewness and the market volatility risk factors are endogenously determined. I show that the price of coskewness and market volatility risk are restricted by investor risk aversion and skewness preference. Consistent with theory, I find that the pricing kern ..."
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I investigate a pricing kernel in which coskewness and the market volatility risk factors are endogenously determined. I show that the price of coskewness and market volatility risk are restricted by investor risk aversion and skewness preference. Consistent with theory, I find that the pricing kernel is decreasing in the aggregate wealth and increasing in the market volatility. When I project my estimated pricing kernel on a polynomial function of the market return, doing so produces the puzzling behaviors observed in pricing kernel. Using pricing kernels, I examine the sources of the idiosyncratic volatility premium. I find that nonzero risk aversion and firms nonsystematic coskewness determines the premium on idiosyncratic volatility risk. When I control for the nonsystematic coskewness factor, I find no significant relation between idiosyncratic volatility and stock expected return. My results are robust across different sample periods, different measures of market volatility and firms characteristics.