Pricing Stock Market Volatility: Does it Matter whether the Volatility is Related to the Business Cycle?

Yunmi Kim and Charles Nelson

Journal of Financial Econometrics, 2014, vol. 12, issue 2, 307-328

Abstract: This article investigates the impact of business cycle-related market volatility on expected returns. We develop a model that enables us to decompose the market volatility into two components: business cycle-related volatility and unrelated volatility. Then, the risk–return relation is assessed based on these two components. Our empirical results demonstrate that business cycle-related market volatility is priced in the stock market, whereas the unrelated component is not. Furthermore, our procedure identifies a few periods of high volatility that are not related to recessions, including the 1987 crash and the 1998 Russian default.

Date: 2014
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Citations: View citations in EconPapers (7)

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