Stock Returns and Volatility: Pricing the Long-Run and Short-Run Components of Market Risk
In this paper, we examine the importance of market volatility dynamics for asset pricing, focusing on a decomposition of volatility into a short-run, quickly mean reverting component and a long-run, slowly evolving component. Within an ICAPM model, we show that the stochastic discount factor is a function of both the long- and short-run volatility components as well as the market return. The major results of the paper concern the pricing of short- and long-run volatility components in the 25 size and book-to-market sorted portfolios. In monthly cross-sectional regressions for 1963-2003, we find that both the long-run and short-run components of market volatility are highly signi.cant asset pricing factors with a negative price of risk. As the long- and short-run volatility components are negatively correlated with the market return, this finding is consistent with the prediction of the ICAPM that investors hedge innovations in volatility. The price of risk of the long-run volatility component is six times higher than the price of risk of the short-run component. When we include the Hml and Smb factors of Fama and French (1993) in the cross-sectional regression, the volatility components stay highly significant, whereas Hml and Smb are insignificant. We also split our sample to study the period 1986-2003, which allows us to compare our three-factor model to the one based on market implied volatility (VIX) as proposed by Ang, Hodrick, Xing, and Zhang (2004). We find that our volatility estimates are highly correlated with implied volatility. However, in cross-sectional pricing, our three-factor model generates a 22％ lower J-statistic than the model with the VIX and the market return as pricing factors. In addition, over the shorter sample period, our model signi.cantly outperforms the Fama-French three-factor model, with a J-statistic that is 15％ smaller. The long-run volatility factor is highly correlated with macroeconomic measures such as the growth rate of industrial production (-29％), changes in the unemployment rate (23％), and measures of macro- economic uncertainty, showing that the long-run component is counter-cyclical. The short-run volatility component is highly correlated with measures of market liquidity and interest rates.
asset pricing stochastic volatility ICAPM
Tobias Adrian Joshua Rosenberg
With Capital Markets Research,Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045.
国际会议
昆明
英文
2005-07-05（万方平台首次上网日期，不代表论文的发表时间）