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Aggregate Volatility Expectations and Threshold CAPM

Author

Listed:
  • Eser Arisoy

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Aslihan Altay-Salih
  • Levent Akdeniz

Abstract

We propose a volatility-based capital asset pricing model (V-CAPM) in which asset betas change discretely with respect to changes in investors' expectations regarding near-term aggregate volatility. Using a novel measure to proxy for expected changes in aggregate volatility, i.e. monthly range of the VIX index (RVIX), we find that portfolio betas change significantly when aggregate volatility expectations is beyond a certain threshold level. Due to changes in their market betas, small and value stocks are perceived as riskier than their big and growth counterparts in bad times, when aggregate volatility is expected to be high. The model yields a positive and significant market risk premium during periods when investors do not expect significant changes in near-term aggregate volatility. The findings support a volatility-based time-varying risk explanation.

Suggested Citation

  • Eser Arisoy & Aslihan Altay-Salih & Levent Akdeniz, 2015. "Aggregate Volatility Expectations and Threshold CAPM," Post-Print hal-01634175, HAL.
    • Handle: RePEc:hal:journl:hal-01634175
    DOI: 10.1016/j.najef.2015.09.013
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    More about this item

    Keywords

    Aggregate volatility; Threshold regression; Conditional CAPM; Range; VIX;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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