Aggregate volatility risk: Explaining the small growth anomaly and the new issues puzzle

Alexander Barinov

Journal of Corporate Finance, 2012, vol. 18, issue 4, 763-781

Abstract: The paper shows that new issues earn low expected returns because they are a hedge against increases in expected aggregate volatility. Consistent with that, the ICAPM with the aggregate volatility risk factor can explain the new issues puzzle, as well as the small growth anomaly and the cumulative issuance puzzle. The key mechanism is that, all else equal, growth options become less sensitive to the underlying asset value and more valuable as idiosyncratic volatility goes up. Idiosyncratic volatility usually increases together with aggregate volatility, that is, in recessions.

Keywords: Idiosyncratic volatility; Aggregate volatility risk; New issues; Small growth anomaly; Growth options (search for similar items in EconPapers)
JEL-codes: E44 G12 G13 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (10)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:18:y:2012:i:4:p:763-781

DOI: 10.1016/j.jcorpfin.2012.05.005

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