Aggregate volatility expectations and threshold CAPM

Date
2015
Authors
Arisoy, Y. E.
Altay-Salih, A.
Akdeniz, L.
Advisor
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Source Title
North American Journal of Economics and Finance
Print ISSN
1062-9408
Electronic ISSN
Publisher
Elsevier Inc.
Volume
34
Issue
Pages
231 - 253
Language
English
Type
Article
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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 uncertainty about expected changes in aggregate volatility, i.e. monthly range of the VIX index (RVIX), we find that portfolio betas change significantly when uncertainty about 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 uncertainty about aggregate volatility expectations is high. The proposed model yields a positive and significant market risk premium during periods when investors do not expect significant uncertainty in near-term aggregate volatility. Our findings support a volatility-based time-varying risk explanation.

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Keywords
Aggregate volatility, Conditional CAPM, Range, Threshold regression, VIX
Citation
Published Version (Please cite this version)