Implied Volatility and the Cross Section of Stock Returns in the UK

Poshakwale, Sunil, Chandorkar, Pankaj and Agarwal, Vineet (2019) Implied Volatility and the Cross Section of Stock Returns in the UK. Research in International Business and Finance, 48. pp. 271-286. ISSN 0275-5319

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Abstract

The paper examines the relationship and the cross-sectional asset pricing implications of risk arising from the innovations in the short and the long-term implied market volatility on excess returns of the FTSE100 and the FTSE250 indices and the 25 value-weighted Fama-French style portfolios in the UK. Findings suggest that after controlling for valuation, macroeconomic, leading economic and business cycle indicators, returns exhibit a strong negative relationship with the innovations in both the short and the long-term implied market volatility. The cross-sectional regression provides new evidence that changes in both short and long-term implied market volatility are significant asset pricing factors with negative prices of risk, which suggests that (i) investors care about ex-ante volatility and (ii) they are willing to pay for insurance for future uncertainty.

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