Expected Stock Market Returns and Volatility: Three Decades Later

Haimanot Kassa, Feifei Wang and Yan Xuemin (Sterling)

Critical Finance Review, 2023, vol. 12, issue 1-4, 271-307

Abstract: We replicate the findings of French, Schwert, and Stambaugh (FSS, 1987) almost exactly. Consistent with FSS, we find modest evidence of a positive relation between market risk premium and the expected market volatility and strong evidence of a negative relation between market excess returns and the unexpected change in market volatility during 1928 to 1984. These results persist during 1985 to 2018 and are robust to alternative data and model specifications. We extend the analysis to 23 developed countries and find qualitatively similar results. We show that the risk-return tradeoff is stronger during expansions than during recessions and does not vary significantly with investor sentiment.

Keywords: Expected market return; Volatility; Risk-return tradeoff; EGARCH (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 G15 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000132

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