Systematic Volatility Research Articles

Tax Policy Uncertainty and Stock Return Volatility

We investigate whether uncertainty surrounding tax policy is associated with investors’ perceptions about the riskiness of firms’ tax avoidance strategies, controlling for other sources of general macroeconomic uncertainty. To test our prediction, we rely on long-run cash effective tax rates (ETRs) to identify firms that have maintained relatively low cash ETRs over the prior five years. We then examine how tax policy uncertainty (TPU) and tax avoidance interact in a model of firm risk. Consistent with our prediction, our results indicate that macro-level TPU is positively associated with investors’ perceptions about the riskiness of cash flows stemming from tax planning activities. We perform analyses to evaluate our measure of TPU based on how it correlates with actual tax-related legislative activity, individually and relative to other policy uncertainty indices (debt, spending, entitlements, etc.). The results of these tests provide assurance that our primary measure of interest captures tax-related policy uncertainty. Second, consistent with economic theory which suggests that macro-level policy uncertainty is a source of systematic risk to investors, we predict and find that the interaction between TPU and tax avoidance activity is concentrated primarily in systematic volatility. We further condition our interaction of interest on a proxy for low tax-related information quality (i.e., highly volatile ETRs). Consistent with Rajgopal and Venkatachalam (2011) who argue that idiosyncratic firm risk is, at some level, a function of the firm’s information environment, we find that our interaction of interest is associated with idiosyncratic volatility for firms with lower tax-related information quality.

How the Last Call Auction of Underlying Stock Market Affects the Price Behaviors of Continuous Trading Index Futures

By using the equality test and panel regression, we study the effects of around the last five minutes call auction of underlying stock market on price behaviors of continuous trading TAIFEX index futures. First, continuous trading enables a better reaction to new information and improved risk sharing, resulting in a larger trading volume. Moreover, high systematic volatility loadings, during the hided call auction period in stock market, will increase their price and lowers their average return. With high uncertainty during last 5 minutes call auction period with hided information, futures markets are characterized by price volatility in excess of the theoretical volatility of equilibrium prices.

Revenue Volatility in German Nonprofit Sports Clubs

Revenue volatility hinders the planning within nonprofit organizations, and as a consequence, it can influence the organization’s contribution to public welfare. To analyze the extent of revenue volatility and its determinants, this paper uses a comprehensive, longitudinal, data set of German nonprofit sports clubs ( n = 724). It distinguishes between systematic volatility and club-specific volatility, and argues that a complete understanding of the sources and impacts of volatility requires one to clearly distinguish between the two components. Empirical results indicate that revenue diversification can significantly reduce club-specific volatility, but has more minimal benefits for lowering systematic volatility. It also reveals that clubs that rely more heavily on membership fees, and less on subsidies, appear to have reduced levels of systematic and club-specific volatility, with the impact being much greater for the latter.

Stock price synchronicity and liquidity

We argue and provide evidence that stock price synchronicity affects stock liquidity. Under the relative synchronicity hypothesis, higher return co-movement (i.e., higher systematic volatility relative to total volatility) improves liquidity. Under the absolute synchronicity hypothesis, stocks with higher systematic volatility or beta are more liquid. Our results support both hypotheses. We find all three illiquidity measures (effective proportional bid-ask spread, price impact measure, and Amihud's illiquidity measure) are negatively related to stock return co-movement and systematic volatility. Our analysis also shows that larger industry-wide component in returns improves liquidity. We find that improvement in liquidity following additions to the S&P 500 Index is related to the stock's increase in return co-movement.

Pricing of Volatility Risk in REITs

We examine the pricing of volatility risk in the cross-section of equity real estate investment trust (REIT) stock returns over the 1996 to 2010 period. We consider both aggregate (systematic) volatility and firm-specific (idiosyncratic) volatility. In contrast to the negative and significant price of systematic volatility risk for non-REIT equities, we find that systematic volatility is not priced in REIT returns. Idiosyncratic volatility, estimated using the Fama and French (1993) three-factor model, is negatively priced in the cross-section and is largely independent of non-REIT idiosyncratic volatility. Within the total volatility risk profile, idiosyncratic volatility dominates aggregate volatility in REIT pricing.

The Determination of Mortgage Insurance Premiums Under Information Asymmetry

The recent financial crisis has posed new challenges to the pricing issue of mortgage insurance premiums. By extending an option-based approach to this pricing issue, we attempt to tackle several key challenges including the clustering of mortgage defaults, the diversification effect of underlying property pools and mortgage insurers’ information advantages. Our model partitions the volatility of collateralized property prices into idiosyncratic volatility and systematic volatility so that we can conduct an in-depth investigation on the effects of these two categories of shocks. Our results demonstrate that although the rising number of pooled mortgage loans can reduce the volatility of average default losses, the increasing correlation between the collateralized properties can lead to the volatility clustering of these losses.

Pricing of Firm Specific Jump Risk

This paper studies the relationship between the cross section of stock returns and firm specific jump risk. Using option data, we estimate various option-based time-series. Sorting firms according to their firm specific jump risk, we find that this risk is priced for small stocks. Furthermore, we show that it is genuinely idiosyncratic, and not related to systematic volatility or systematic jump risk. We also find that firms have similar exposures to upward and downward jumps and both jumps are negatively priced, but the effect is more pronounce for downward jumps. Besides, it is documented that our results are closely linked to the idiosyncratic volatility (ivol) anomaly by Ang et al. (2006). Therefore, if ivol proxies for an omitted factor, our results suggest that the exposure to idiosyncratic jump risk is related to this factor.

Systematic Volatility of Unpriced Earnings Shocks

Some important puzzles in macro finance can be resolved in a model featuring systematically varying volatility of unpriced shocks to firms' earnings. In the data, the correlation between corporate debt and stock market valuations is low. The model accounts for this via the opposing effect of unpriced earnings risk on levered debt and equity prices. The model also explains the low (or nonexistent) risk-reward relation for the market portfolio of levered equity via the opposing effects of unpriced and priced uncertainty (both components of stock volatility) on the levered equity risk premium. Versions of the model calibrated to empirical measures of both types of fundamental risk can quantitatively substantiate these explanations. Variation in residual earning dispersion accounts for a significant fraction of observed disagreement between debt and equity valuations, and of realized stock volatility. The implication that the two components of risk should forecast the levered equity risk premium with opposite signs is also supported in the data. The results are a notable advance for risk-based asset pricing.

The Costs of ETF Membership: Valuation Effect of ETFs on Underlying Firms

In this paper, we investigate the effect of exchange traded funds (ETFs) on the value of their underlying stocks and the channels through which ETFs have an impact on firm value. We find that ETFs negatively affect firm value but also have a positive impact on underlying stocks’ systematic volatility, short interest, and liquidity. These effects of ETF on firm value and stock characteristics are more pronounced for small firms. We further find that the positive effects of ETFs on these stock characteristics are the main channels through which ETFs negatively impact firm value. Although stock liquidity is known to have a positive effect on firm value, increases in stock liquidity driven by ETFs have a negative effect on firm value because these increases facilitate short-selling activities by investors.

Investor Sentiment and Systematic Volatility Pricing

This paper aims at providing new insights on the pricing of systematic volatility risk by incorporating investor sentiment in the relation between sensitivity to innovations in implied market volatility and expected stock returns. Using both cross-sectional and time series analysis, we investigate the effect of the exposure to aggregate volatility risk on stock returns in both high-sentiment and low-sentiment regimes. We find that exposure to aggregate volatility risk is negatively related to returns when sentiment is low. However, this relation loses its significance when sentiment is high. The documented negative relation is robust to controls for other variables, suggesting that aggregate volatility risk is an independent risk factor only during low sentiment periods.

Investor Sentiment and Systematic Volatility Pricing

Investor Sentiment and Systematic Volatility Pricing

Systematic Volatility of Unpriced Earnings Shocks

Systematic Volatility of Unpriced Earnings Shocks

Pricing of Volatility Risk in REITs

We examine the pricing of volatility risk in the cross-section of equity Real Estate Investment Trust (REIT) stock returns over the 1996 – 2010 period. We consider both aggregate (systematic) volatility and firm-specific (idiosyncratic) volatility. In contrast to the negative and significant price of systematic volatility risk for Non-REIT equities, we find that systematic volatility is not priced in REIT returns. Idiosyncratic volatility, estimated using the Fama and French (1993) three factor model, is negatively priced in the cross-section and is largely independent of Non-REIT idiosyncratic volatility. Within the total volatility risk profile, idiosyncratic volatility dominates aggregate volatility in REIT pricing.

Precarious Politics and Return Volatility

We examine how local and global political risks affect industry return volatility. Our central premise is that some industries are more sensitive to political events than others. We find that industries that are more dependent on trade, contract enforcement, and labor exhibit greater return volatility when local political risks are higher. Political uncertainty in countries of trading partners of trade-dependent industries similarly results in greater volatility. Volatility decomposition results indicate that while systematic volatility is associated with domestic political uncertainty, global political risks translate into larger idiosyncratic volatility. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oup.com., Oxford University Press.

Coassimetria e cocurtose na análise dos preços das ações no mercado financeiro nacional

The central issue of this research is to investigate and measuring the stock price in the brazilian financial market. It was investigate the influence of the third and fourth time in the pricing of assets, the influence of co-skewness in correlation with the proxy IBOV stocks, the influence of co-kurtosis in correlation with the proxy IBOV stocks, the influence of co-skewness and co-kurtosis in the correlation between the proxy IBOV and stocks, its performance compared with the CAPM and the increase of the accuracy. Is was developed literature research and study of time series of the stocks that constitutes the Ibovespa index on 30 May 2008, analyzed with the use of multiple regressions with the variables to systematic volatility, the systematic skewness and systematic kurtosis. As a result it was observed conclusively that co-skewness and co-kurtosis do not improve the performance of the model of pricing of assets.

Systematic factors, information release and market volatility

Recent several months have demonstrated historical levels of market volatility; sometimes attributed to changes in previously hypothesized systematic risk factors, however many times without any known reason other than the overreaction by market participants. Times like these make it even more important that we have a better understanding of how markets receive and evaluate new information about systematic risk factors such as macroeconomic variables. Despite a strong intuitive notion and established theoretical relationships that these risk factors should influence equity values, few studies have been able to establish this relationship empirically. Previous research has used cash-market prices for equity indices, but perhaps options on those indices are more sensitive to the new information released to the market by the announcement of macroeconomic variables, as suggested by numerous empirical studies supporting the hypothesis that option traders might be a better informed segment of the population. In...

The Pricing of Risk-Neutral Systematic Moments in the Cross-Section of Expected Returns

This study investigates if changes in risk-neutral systematic volatility, skewness, and kurtosis, are priced, either symmetrically or asymmetrically, as systematic risk factors in the cross-section of stock returns. The moments are constructed using options on the S&P 500, and represent investors' expectation of the distribution of future market returns. Portfolio analyses reveal positive changes in implied market skewness are priced between -5% to -11% annually, while negative changes in implied market skewness are not priced. Additionally, when accounting for an asymmetric relation between returns and implied market skewness, changes in implied market volatility and kurtosis are not priced. The results are robust to portfolio weighting, market capitalization, book-to-market equity ratio, idiosyncratic volatility, and idiosyncratic skewness. Time-series and cross-sectional analyses confirm the portfolio results and associate positive changes in implied market skewness with a negative price of risk. An implied market skewness tracking portfolio possesses a great deal of power to price a variety of portfolio returns, and subsumes other typical hedge portfolios used in asset pricing. The results present a challenge to the theoretical asset pricing models, since the asymmetric results cannot be accounted for in an ICAPM framework, and the pricing of only positive skewness changes is inconsistent with the predictions of prospect theory.

FX Comovements: Disentangling the Role of Market Factors, Carry-Trades and Idiosyncratic Components

This paper models high and low frequency dynamic components of FX excess return correlations and examines their relationship with economic fundamentals. A factor currency pricing model is used to characterize the correlation structure of FX excess returns. I provide evidence on high levels of comovement in FX markets during the post-crisis (or recovery) period following the 2008 financial turmoil. I find that while the low frequency component of systematic volatility shows an increasing trend during this recent period, the low frequency component of idiosyncratic volatilities presents declining patterns. These two effects explain the increase in average long-term correlations. In terms of idiosyncratic effects, my results suggest that country-specific inflation levels and real output growth significantly affect the time-series and cross-sectional variation of long-term FX idiosyncratic volatilities.

Variance Risk Premium and Cross-Section of Stock Returns

We use equity option prices and high frequency stock prices to estimate stock’s variance risk premium (V RP ), dened as the dierence between the expected variances under the risk-neutral measure and under the empirical measure. Cross-sectionally, V RP is signicantly related to stocks’ sensitivities to common risk factors. In particular, stocks whose returns tend to be low when systematic volatility increases have higher variance risk premium. We nd that stock’s expected returns increase with their variance risk premium. Stocks ranked in the top V RP quintile on average outperform those in the bottom quintile by 1.84% (resp. 1.44%) per month when portfolios are value-weighted (resp. equal-weighted). We reject explanations based on stock mispricing or informed trading in options. Our result is linked to another new nding: stocks with low beta with respect to change in the average idiosyncratic volatility or the market variance risk premium have high expected returns.

Implied Systematic Moments and the Cross-Section of Stock Returns

Using the risk-neutral volatility and skewness computed from options on the S&P500, we show there is an asymmetric contemporaneous relation between stock returns and changes in implied market volatility and skewness. Changes in expected market volatility and skewness are cross-sectionally priced only when implied market volatility or skewness increases. All stocks have similar returns when implied systematic volatility and/or skewness are decreasing. The economic impact of stocks' sensitivities to changes in expected market skewness is almost twice as much as sensitivities to changes in expected market volatility. These findings highlight the importance of not only implied systematic volatility to investors, but also the sensitivity to changes in implied systematic skewness.