The pricing of volatility risk in the US equity market

Lukas Hitz, Ismail H. Mustafi and Heinz Zimmermann

International Review of Financial Analysis, 2022, vol. 79, issue C

Abstract: We analyze whether the pricing of volatility risk depends on the asset pricing framework applied in the tests, the specified volatility proxies, and the portfolio sorts used for spanning the asset universe. For this purpose, we compare the results using a macroeconomic and fundamental based asset pricing model using three proxies of volatility and uncertainty, using size/value sorted and industry sector portfolios. Our results reveal that the marginal pricing effect of the VIX volatility factor is strong and statistically significant throughout the models and specifications, while the effect of an EGARCH-based volatility factor is mixed, mostly smaller but with the correct sign. In most cases, the EGARCH factor does not impair the pricing effect of the VIX. The portfolio sorts have a substantial impact on the volatility premiums in both model frameworks. The size of the volatility risk premium is more uniform across the models if the industry sector portfolio sort is used. Finally, the size/value portfolio sort generates larger volatility risk premiums for both models.

Keywords: Pricing of volatility risk; Cross sectional asset pricing; Macroeconomic vs. fundamental risk factors; Evaluation of portfolio sort technique (search for similar items in EconPapers)
JEL-codes: C52 E44 G12 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:79:y:2022:i:c:s1057521921002702

DOI: 10.1016/j.irfa.2021.101951

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