Using options-implied variance, a forward-looking measure of conditional variance, we revisit the debate on the idiosyncratic risk-return relation. In both cross-sectional (for individual stocks) and time-series (for the market index) regressions, we find a negative relation between...

There is an ongoing debate in the literature about the apparent weak or negative relation between risk (conditional variance) and return (expected returns) in the aggregate stock market. We develop and estimate an empirical model based on the ICAPM to investigate this relation. Our primary...

We propose a novel conditional value premium measure based on the present-value relation that market reaction to a firm's public announcement reveals the firm's discount rates. Specifically, because most splitting stocks are growth stocks on which, by construction, the value premium has strong...

Accruals correlate closely with the determinants of conditional equity premium at both the firm and the aggregate levels. The common component of firm-level accruals, which cannot be diversified away by aggregation, explains the positive relation between aggregate accruals and future stock...

Stock market variance-return or price relations are sometimes negative and sometimes positive. We explain these puzzling findings using a model with two ("bad" and "good") variances. In the model, conditional equity premium depends positively on bad variance and negatively on good variance....

We show in two ways that, ceteris paribus, investors require a positive return premium for taking aggregate distress risk. First, aggregate distress risk correlates positively with future excess stock market returns. Second, stocks that provide a poor hedge against aggregate distress risk have...

We examine the time-series relation between aggregate bid-ask spreads and conditional equity premium. We document that average market-wide relative effective bid-ask spreads forecast aggregate market returns only when controlling for average idiosyncratic variance. This control allows us to...

Using options-implied variance, a forward-looking measure of conditional variance, we revisit the debate on the idiosyncratic risk-return relation. In both cross-sectional (for individual stocks) and time-series (for the market index) regressions, we find a negative relation between...

Using options-implied variance, a forward-looking measure of conditional variance, we revisit the debate on the idiosyncratic risk-return relation. In both cross-sectional (for individual stocks) and time-series (for the market index) regressions, we find a negative relation between...

A spurious positive relation between EGARCH estimates of expected month t idiosyncratic volatility and month t stock returns arises when the month t return is included in the estimation of model parameters. We illustrate via simulations that this look-ahead bias is problematic for empirically...