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Is volatility risk priced after all? Some disconfirming evidence

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  • Geoffrey Loudon
  • Alan Rai

Abstract

Recent theory and evidence from US studies suggest that aggregate market volatility risk is a strong candidate for inclusion in the list of risk factors that earn a risk premium in equilibrium. We re-examine the sensitivity of stock returns to volatility risk using delta-neutral index option straddles to proxy for innovations in aggregate volatility. Contrary to existing US evidence, our analysis finds little evidence that volatility risk is priced in Australian equities. This finding is robust across a variety of methods for characterizing the underlying volatility factor.

Suggested Citation

  • Geoffrey Loudon & Alan Rai, 2007. "Is volatility risk priced after all? Some disconfirming evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 17(5), pages 357-368.
    • Handle: RePEc:taf:apfiec:v:17:y:2007:i:5:p:357-368
    DOI: 10.1080/09603100600675516
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    References listed on IDEAS

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    Cited by:

    1. Jian Chen & Xiaoquan Liu, 2010. "The model-free measures and the volatility spread," Applied Economics Letters, Taylor & Francis Journals, vol. 17(18), pages 1829-1833.
    2. 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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