One Vol to Rule Them All: Common Volatility Dynamics in Factor Returns
SSRN, ISSN: 1556-5068
2020
- 4Citations
- 1,721Usage
- 12Captures
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Example: if you select the 1-year option for an article published in 2019 and a metric category shows 90%, that means that the article or review is performing better than 90% of the other articles/reviews published in that journal in 2019. If you select the 3-year option for the same article published in 2019 and the metric category shows 90%, that means that the article or review is performing better than 90% of the other articles/reviews published in that journal in 2019, 2018 and 2017.
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Article Description
We show that there is strong commonality in the volatility of a wide range of diversified equity portfolios. Common factor volatility (CFV) exists even when factor or anomaly returns are market-adjusted and does not appear to be attributable to common microstructure noise or a lack of diversification. CFV closely relates to previously identified commonality in idiosyncratic volatility, implying that a common volatility feature pervades the entire spectrum of equity return variation. Models exploiting commonality in volatility improve factor volatility forecasts relative to conventional factor-specific approaches. We show that because CFV is so pervasive, it can be used to sharpen restrictions on volatility dynamics of candidate return-based SDFs which are ubiquitous in the asset pricing literature. The relation between CFV and common measures of fundamental uncertainty is relatively weak and we find limited support for the hypothesis that variation in growth options, operating or financial leverage drives CFV. The ultimate sources of common equity volatility dynamics, therefore, constitute an important unresolved puzzle in finance.
Bibliographic Details
http://www.scopus.com/inward/record.url?partnerID=HzOxMe3b&scp=85109967069&origin=inward; http://dx.doi.org/10.2139/ssrn.3606637; https://www.ssrn.com/abstract=3606637; https://dx.doi.org/10.2139/ssrn.3606637; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3606637; https://ssrn.com/abstract=3606637
Elsevier BV
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