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Aggregate volatility risk: Explaining the small growth anomaly and the new issues puzzle

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  • Barinov, Alexander

Abstract

The paper shows that new issues earn low expected returns because they are a hedge against increases in expected aggregate volatility. Consistent with that, the ICAPM with the aggregate volatility risk factor can explain the new issues puzzle, as well as the small growth anomaly and the cumulative issuance puzzle. The key mechanism is that, all else equal, growth options become less sensitive to the underlying asset value and more valuable as idiosyncratic volatility goes up. Idiosyncratic volatility usually increases together with aggregate volatility, that is, in recessions.

Suggested Citation

  • Barinov, Alexander, 2012. "Aggregate volatility risk: Explaining the small growth anomaly and the new issues puzzle," Journal of Corporate Finance, Elsevier, vol. 18(4), pages 763-781.
    • Handle: RePEc:eee:corfin:v:18:y:2012:i:4:p:763-781
    DOI: 10.1016/j.jcorpfin.2012.05.005
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    References listed on IDEAS

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    Cited by:

    1. Arısoy, Yakup Eser & Altay-Salih, Aslıhan & Akdeniz, Levent, 2015. "Aggregate volatility expectations and threshold CAPM," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 231-253.
    2. Claudiu Vințe & Marcel Ausloos, 2023. "Portfolio Volatility Estimation Relative to Stock Market Cross-Sectional Intrinsic Entropy," JRFM, MDPI, vol. 16(2), pages 1-24, February.
    3. Barinov, Alexander & Wu, Juan (Julie), 2014. "High short interest effect and aggregate volatility risk," Journal of Financial Markets, Elsevier, vol. 21(C), pages 98-122.
    4. Claudiu Vinte & Marcel Ausloos, 2022. "The Cross-Sectional Intrinsic Entropy. A Comprehensive Stock Market Volatility Estimator," Papers 2205.00104, arXiv.org.
    5. Ferreira Filipe, Sara & Grammatikos, Theoharry & Michala, Dimitra, 2016. "Pricing default risk: The good, the bad, and the anomaly," Journal of Financial Stability, Elsevier, vol. 26(C), pages 190-213.
    6. Barinov, Alexander, 2023. "Profitability anomaly and aggregate volatility risk," Journal of Financial Markets, Elsevier, vol. 64(C).
    7. Barinov, Alexander, 2015. "Why does higher variability of trading activity predict lower expected returns?," Journal of Banking & Finance, Elsevier, vol. 58(C), pages 457-470.
    8. Mai, Van Anh (Vivian) & Ang, Tze Chuan ‘Chewie’ & Fang, Victor, 2016. "Aggregate volatility risk and the cross-section of stock returns: Australian evidence," Pacific-Basin Finance Journal, Elsevier, vol. 36(C), pages 134-149.

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    More about this item

    Keywords

    Idiosyncratic volatility; Aggregate volatility risk; New issues; Small growth anomaly; Growth options;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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