Unknown Unknowns: Uncertainty About Risk and Stock Returns

Guido Baltussen*, Sjoerd Bekkum, B van der Grient

*Corresponding author for this work

Research output: Contribution to journalArticleAcademicpeer-review

27 Citations (Scopus)

Abstract

Stocks with high uncertainty about risk, as measured by the volatility of expected volatility (vol-of-vol), robustly underperform stocks with low uncertainty about risk by 8% per year. This vol-of-vol effect is distinct from (combinations of) at least 20 previously documented return predictors, survives many robustness checks, and holds in the United States and across European stock markets. We empirically explore the pricing mechanism behind the vol-of-vol effect. The evidence points toward preference-based explanations and away from alternative explanations. Collectively, our results show that uncertainty about risk is highly relevant for stock prices.
Original languageEnglish
Pages (from-to)1-37
Number of pages37
JournalJournal of Financial and Quantitative Analysis
Volume53
Issue number4
DOIs
Publication statusPublished - 2018

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