Is Aggregate Volatility a Priced Risk Factor

TLDR: In this paper, the authors show that the relationship between sensitivity to changes in aggregate volatility and expected return on stocks documented by Ang et al. (2006) for the fifteen-year period from 1986 to 2000 have disappeared in the following fifteen years period.

Abstract: This paper shows that the relationships between sensitivity to changes in aggregate volatility and expected return on stocks documented by Ang et al. (2006) for the fifteen-year period from 1986 to 2000 have disappeared in the following fifteen-year period. Aggregate volatility betas in the portfolio pre-formation month have not predicted post-formation returns. Alphas from time-series regressions of excess returns on the high-minus-low sensitivity to aggregate volatility portfolio with respect to the CAPM, the Fama-French 3-factor model, and the Fama-French 5-factor model have not been statistically different from zero. Finally, the price of aggregate volatility risk has not been statistically different from zero. These findings raise an important question of whether the empirical results on the relationships between sensitivity to changes in aggregate volatility and expected stock returns in Ang et al. (2006) held based on rational expectations or due to mispricing. Additionally, I present evidence that the price of aggregate volatility risk may be asymmetric.