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Asset volatility

Author

Listed:
  • Maria Correia

    (London School of Economics and Political Science)

  • Johnny Kang

    (BlackRock)

  • Scott Richardson

    (AQR Capital Management LLC, London Business School)

Abstract

We examine whether fundamental measures of volatility are incremental to market-based measures of volatility in (i) predicting bankruptcies (out of sample), (ii) explaining cross-sectional variation in credit spreads, and (iii) explaining future credit excess returns. Our fundamental measures of volatility include (i) historical volatility in profitability, margins, turnover, operating income growth, and sales growth; (ii) dispersion in analyst forecasts of future earnings; and (iii) quantile regression forecasts of the interquartile range of the distribution of profitability. We find robust evidence that these fundamental measures of volatility improve out-of-sample forecasts of bankruptcy and help explain cross-sectional variation in credit spreads. This suggests that an analysis of credit risk can be enhanced with a detailed analysis of fundamental information. As a test case of the benefit of volatility forecasting, we document an improved ability to forecast future credit excess returns, particularly when using fundamental measures of volatility.

Suggested Citation

  • Maria Correia & Johnny Kang & Scott Richardson, 2018. "Asset volatility," Review of Accounting Studies, Springer, vol. 23(1), pages 37-94, March.
    • Handle: RePEc:spr:reaccs:v:23:y:2018:i:1:d:10.1007_s11142-017-9431-1
    DOI: 10.1007/s11142-017-9431-1
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    References listed on IDEAS

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    More about this item

    Keywords

    credit spreads; volatility; bankruptcy; default;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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