The cross-sectional variation of volatility risk premia

González‐Urteaga, Ana; Rubio, Gonzalo

doi:10.1016/j.jfineco.2015.09.009

Cited by 43 publications

(15 citation statements)

References 38 publications

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“…Finally, to verify the robustness of our findings, we control for various cross-sectional effects put forward in the empirical literature. These include idiosyncratic volatility, which is measured as in Ang et al (2006b) relative to the Fama-French three-factor model, illiquidity measured as in Amihud (2002), risk-neutral skewness computed following Bakshi et al (2003) and examined by Conrad et al (2013), signed jump variation examined by Bollerslev et al (2017), and exposures to some market-wide factors such as market risk-neutral skewness examined by Chang et al (2013), market variance risk premium (Han andZhou, 2011, andGonzález-Urteaga andRubio, 2016), and downside risk factors motivated by the behavioral theory of disappointment aversion of Gul (1991) and examined by Farago and Tédongap (forthcoming).…”

Section: The Cross-section Of Variance Risk Premium and Expected Stocmentioning

confidence: 99%

Variance Premium, Downside Risk, and Expected Stock Returns

Feunou¹,

Aliouchkin²,

Tedongap³

et al. 2017

SSRN Journal

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We decompose total variance into its bad and good components and measure the premia associated with their fluctuations using stock and option data from a large cross-section of firms. The total variance risk premium (VRP) represents the premium paid to insure against fluctuations in bad variance (called bad VRP), net of the premium received to compensate for fluctuations in good variance (called good VRP). Bad VRP provides a direct assessment of the degree to which asset downside risk may become extreme, while good VRP proxies for the degree to which asset upside potential may shrink. We find that bad VRP is important economically; in the cross-section, a one-standard-deviation increase is associated with an increase of up to 13% in annualized expected excess returns. Simultaneously going long on stocks with high bad VRP and short on stocks with low bad VRP yields an annualized risk-adjusted expected excess return of 18%. This result remains significant in double-sort strategies and cross-sectional regressions controlling for a host of firm characteristics and exposures to regular and downside risk factors. Bank topics: Asset pricing; Financial markets JEL code: G12 Résumé Nous décomposons la variance totale en ses éléments positifs et négatifs et mesurons les primes associées à leurs fluctuations à partir de données sur les actions et les options, données tirées d'un vaste échantillon représentatif d'entreprises. La prime liée au risque de la variance (PRV) totale représente la prime à payer pour s'assurer contre les fluctuations d'une variance négative (appelée mauvaise PRV), après déduction de la prime reçue pour compenser les fluctuations de la variance positive (appelée bonne PRV). La mauvaise PRV fournit une évaluation directe du degré d'exacerbation du risque à la baisse pesant sur les actifs, alors que la bonne PRV donne une indication du degré de réduction de la hausse potentielle des prix d'actifs. Nous constatons que la mauvaise PRV revêt une importance économique; dans l'échantillon représentatif d'entreprises, à une augmentation d'un écart-type correspond une augmentation de l'excédent de rendement attendu pouvant aller jusqu'à 13 % (en taux annualisé). Prendre une position longue sur des titres assortis d'une mauvaise PRV élevée, en concomitance avec une position courte sur des titres assortis d'une mauvaise PRV faible, procure un excédent de rendement attendu (en taux annualisé, ajusté en fonction des risques) de 18 %. Ces résultats demeurent significatifs dans les stratégies dichotomiques et les régressions transversales tenant compte d'une série de caractéristiques des entreprises et d'expositions à des risques habituels ainsi qu'à des risques à la baisse.

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Section: The Cross-section Of Variance Risk Premium and Expected Stocmentioning

confidence: 99%

Variance Premium, Downside Risk, and Expected Stock Returns

Feunou¹,

Aliouchkin²,

Tedongap³

et al. 2017

SSRN Journal

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“…Our rationale for using ex post realized firm performance volatility as a measure of ex ante corporate risk-taking is primarily drawn upon the asset pricing and corporate finance literature that measures risk or risk-taking as the volatility of stock returns (e.g., Brown, Jha, & Pacharn, 2015) or earnings (e.g., Faccio, Marchica, & Mura, 2016;Li, Griffin, Yue, & Zhao, 2013). For example, González-Urteaga and Rubio (2016) show that the default premium is one of key factors explaining the cross-sectional 4 variation of average volatility of risk premia, while Faccio, et al (2016) examine a relation between CEO gender and corporate risk-taking, measured as the standard deviation of the firm's ROA.…”

Section: Introductionmentioning

confidence: 99%

Corporate debt maturity and future firm performance volatility

Adachi-Sato

Vithessonthi

2019

International Review of Economics & Finance

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We propose a simple idea that corporate debt maturity should serve as a good indicator of future firm performance volatility. We show in a simple two-period model that the riskiness of corporate investment is a decreasing function of corporate debt maturity. If "observable" corporate debt maturity and ex ante "unobservable" corporate risk-taking is highly correlated, corporate debt maturity should be highly correlated with "ex post" realized firm performance volatility in following years. Using data on firms in 10 developing and developed countries during 1991−2013, we find that corporate debt maturity is negatively associated with future firm operating performance volatility but is not associated with future firm value volatility.

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“…In this context, higher idiosyncratic volatility is shown to raise the average household's marginal utility. Indeed, González-Urteaga and Rubio (2016) analyze the determinants of the cross-sectional variation of the average volatility risk premia for a set of 20 portfolios sorted by volatility risk premium betas. The market volatility risk premium and, in particular, the default premium are shown to be key determinant risk factors in the cross-sectional variation of average volatility risk premium payoffs.…”

Section: Introductionmentioning

confidence: 99%

The Joint Cross-Sectional Variation of Equity Returns and Volatilities

González‐Urteaga

Rubio

2016

SSRN Journal

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This paper analyzes the determinants of the simultaneous cross-sectional variation of return and volatility risk premia. Independently of the model specification employed, the estimated risk premium associated with the default premium beta is always positive and statistically different from zero. Moreover, the risk premium of the market volatility risk premium beta is negative and statistically significant. However, both risk factors are priced economically and statistically differently in the volatility and return segments of the market. On average, common factors in both segments explain 90% of the variability of volatility risk premium portfolios, but only 65% of the variability of equity return portfolios.

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The cross-sectional variation of volatility risk premia

Cited by 43 publications

References 38 publications

Variance Premium, Downside Risk, and Expected Stock Returns

Variance Premium, Downside Risk, and Expected Stock Returns

Corporate debt maturity and future firm performance volatility

The Joint Cross-Sectional Variation of Equity Returns and Volatilities

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