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The joint cross-sectional variation of equity returns and volatilities

Ana González-Urteaga and Gonzalo Rubio

Journal of Banking & Finance, 2017, vol. 75, issue C, 17-34

Abstract: This paper analyzes the determinants of the simultaneous cross-sectional variation of return and volatility risk premia. Independently of the model specification employed, the estimated risk premium associated with the default premium beta is always positive and statistically different from zero. Moreover, the risk premium of the market volatility risk premium beta is negative and statistically significant. However, both risk factors are priced economically and statistically differently in the volatility and return segments of the market. On average, common factors in both segments explain 90% of the variability of volatility risk premium portfolios, but only 65% of the variability of equity return portfolios.

Keywords: Return risk premia; Volatility risk premia; Linear factor models; Default premium; Return and volatility market segmentation (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Date: 2017
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DOI: 10.1016/j.jbankfin.2016.11.013

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