Volatility And Expected Returns Around The World

The authors investigate how the stochastic local (global) market volatility is priced in the cross section of individual stock (country market portfolio) expected returns in the global market setting. They find that innovation in local market volatility (i.e., a local volatility factor) is a pricing factor only in Spain and the U.K. They also discover that innovation in global market volatility (i.e., a global volatility factor) is negatively priced based on the analysis of 23 developed market portfolios after controlling for the global market, value and size factors. Further, they discover that stocks with higher idiosyncratic volatility have lower expected returns in many of 23 developed markets studied in this paper.