Using data from 33 international markets over the period 1990–2017, we reveal that the profitability effect exists in many countries other than the USA, but the size of this effect is sensitive to the measure of profitability and portfolio sorts. The profitability effect is significant in pooled developed and global markets, though less so in emerging markets. The evidence lends support to incorporating a profitability factor in regional/global factor models. Cross‐region and cross‐country analyses show mixed evidence for a positive relationship between profitability effects and market developments, though the overall findings lean toward supporting the prediction of the investment model.

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This paper develops a general equilibrium model and provides empirical support that the market volatility-of-volatility (VOV) predicts market returns and drives the time-varying volatility risk. In asset pricing tests with the market, volatility, and VOV as factors, the risk premium on VOV is statistically and economically significant and robust. Market and volatility risks are not priced in unconditional models, but, consistent with theory, their factor loadings, conditional on VOV, are priced. The pricing impact of VOV strengthens during market crashes, suggesting that VOV is particularly relevant during market turmoil, when investors demand increased compensation for VOV risk.

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