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Aggregate volatility expectations and threshold CAPM

Yakup Arisoy (), Aslıhan Altay-Salih and Levent Akdeniz

The North American Journal of Economics and Finance, 2015, vol. 34, issue C, 231-253

Abstract: We propose a volatility-based capital asset pricing model (V-CAPM) in which asset betas change discretely with respect to changes in investors’ expectations regarding near-term aggregate volatility. Using a novel measure to proxy uncertainty about expected changes in aggregate volatility, i.e. monthly range of the VIX index (RVIX), we find that portfolio betas change significantly when uncertainty about aggregate volatility expectations is beyond a certain threshold level. Due to changes in their market betas, small and value stocks are perceived as riskier than their big and growth counterparts in bad times, when uncertainty about aggregate volatility expectations is high. The proposed model yields a positive and significant market risk premium during periods when investors do not expect significant uncertainty in near-term aggregate volatility. Our findings support a volatility-based time-varying risk explanation.

Keywords: Aggregate volatility; Threshold regression; Conditional CAPM; Range; VIX (search for similar items in EconPapers)
JEL-codes: C13 G12 (search for similar items in EconPapers)
Date: 2015
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Working Paper: Aggregate Volatility Expectations and Threshold CAPM (2015)
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