Asset volatility

Maria Correia (), Johnny Kang () and Scott Richardson ()
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Maria Correia: London School of Economics and Political Science
Johnny Kang: BlackRock
Scott Richardson: AQR Capital Management LLC, London Business School

Review of Accounting Studies, 2018, vol. 23, issue 1, No 2, 37-94

Abstract: Abstract We examine whether fundamental measures of volatility are incremental to market-based measures of volatility in (i) predicting bankruptcies (out of sample), (ii) explaining cross-sectional variation in credit spreads, and (iii) explaining future credit excess returns. Our fundamental measures of volatility include (i) historical volatility in profitability, margins, turnover, operating income growth, and sales growth; (ii) dispersion in analyst forecasts of future earnings; and (iii) quantile regression forecasts of the interquartile range of the distribution of profitability. We find robust evidence that these fundamental measures of volatility improve out-of-sample forecasts of bankruptcy and help explain cross-sectional variation in credit spreads. This suggests that an analysis of credit risk can be enhanced with a detailed analysis of fundamental information. As a test case of the benefit of volatility forecasting, we document an improved ability to forecast future credit excess returns, particularly when using fundamental measures of volatility.

Keywords: credit spreads; volatility; bankruptcy; default (search for similar items in EconPapers)
JEL-codes: G12 G14 M41 (search for similar items in EconPapers)
Date: 2018
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DOI: 10.1007/s11142-017-9431-1

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