Abstract
The paper examines the relationship and the cross-sectional asset pricing implications of risk arising from the innovations in the short and the long-term implied market volatility on excess returns of the FTSE100 and the FTSE250 indices and the 25 value-weighted Fama-French style portfolios in the UK. Findings suggest that after controlling for valuation, macroeconomic, leading economic and business cycle indicators, returns exhibit a strong negative relationship with the innovations in both the short and the long-term implied market volatility. The cross-sectional regression provides new evidence that changes in both short and long-term implied market volatility are significant asset pricing factors with negative prices of risk, which suggests that (i) investors care about ex-ante volatility and (ii) they are willing to pay for insurance for future uncertainty.
Original language | English |
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Pages (from-to) | 271-286 |
Journal | Research in International Business and Finance |
Volume | 48 |
Early online date | 14 Jan 2019 |
DOIs | |
Publication status | Published - 1 Apr 2019 |
Keywords
- VFTSE
- Excess Returns
- Asset Pricing
- Business cycles
- ICAPM
- implied volatility