Abstract
A positive stock market variance-return relation is the key building block of extant rational-expectations asset pricing models. Empirical evidence is elusive despite forty years of intensive academic research. The conjecture is also resoundingly refuted by the late 1990s’ dotcom bubble featured by sharp increases in both market prices and variance. Gao and Martin (2021), Lochstoer and Muir (2021), and Nagel and Xu (2021) interpret empirical findings as evidence of irrational expectations. Ai, Han, and Xu (2021) attribute the weak or negative risk-return relation to learning about economic fundamentals with imperfect signals. Guo, Lin, and Pai (2021) argue for two types of fundamental variance that have opposite effects on conditional equity premium and market prices. More research is needed to explain the risk-return relation puzzle prevalent in both U.S. and Asia-Pacific markets.
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