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Multi-factor volatility and stock returns

He, Zhongzhi (Lawrence), Jie Zhu and Xiaoneng Zhu

Journal of Banking & Finance, 2015, vol. 61, issue S2, S132-S149

Abstract: In light of inconclusive evidence on the relation between market volatility and stock returns, this paper proposes a multi-factor volatility model and examines its impact on cross-sectional pricing. We also evaluate the out-of-sample performance and economic significance of multi-factor volatility. We find that conditional variances of the size and value dynamic factor earn significant and positive variance risk premia. In addition, multi-factor volatility can significantly improve the out-of-sample return predictability with a positive economic gain in asset allocation.

Keywords: Multi-factor volatility; Cross-sectional returns; Out-of-sample predictability; Asset allocation (search for similar items in EconPapers)
JEL-codes: C1 C58 G12 (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:eee:jbfina:v:61:y:2015:i:s2:p:s132-s149