Abstract
We examine the pricing of aggregate volatility risk in the cross-section of stock returns.
Consistent with theory, we find that stocks with high sensitivities to innovations in
aggregate volatility have low average returns. Stocks with high idiosyncratic volatility
relative to the Fama and French (1993, Journal of Financial Economics 25, 2349)
model have abysmally low average returns. This phenomenon cannot be explained by
exposure to aggregate volatility risk. Size, book-to-market, momentum, and liquidity
effects cannot account for either the low average returns earned by stocks with high
exposure to systematic volatility risk or for the low average returns of stocks with
high idiosyncratic volatility.
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