The cross-section of volatility and expected returns

We examine the pricing of aggregate volatility risk in the cross-section of stock returns. Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns. Stocks with high idiosyncratic volatility relative to the Fama and French (1993, Journal of Financial Economics 25, 2349) model have abysmally low average returns. This phenomenon cannot be explained by exposure to aggregate volatility risk. Size, book-to-market, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility risk or for the low average returns of stocks with high idiosyncratic volatility. IT IS WELL KNOWN THAT THE VOLATILITY OF STOCK RETURNS varies over time. While con-siderable research has examined the time-series relation between the volatility of the market and the expected return on the market (see, among others, Camp-bell and Hentschel (1992) and Glosten, Jagannathan, and Runkle (1993)), the question of how aggregate volatility affects the cross-section of expected stoc