An Empirical Research On The Relationship Of Volatility Risk And Stock Returns

According to intertemporal capital asset pricing model,the state variable affecting investor's future investment opportunity set must be the asset pricing factor.Empirical study shows that the volatility is time varying,thus,whether the volatility should be pricing or not is an issue among theoretical realm.It is theoretically and practically meaningful for us to study our country's stock market's volatility risk and its risk price.This paper choses the transaction data of 243 stocks listing on Shanghai stock exchange as the subject investigated.It uses GARCH-M model to estimate market volatility and uses the Standard deviation of residuals in Fama-French three factors model as the substitution variables of idiosyncratic volatility.After getting the market and idiosyncratic volatility data,this paper brings the market volatility and idiosyncratic volatility into the capital asset pricing model respectively.And then it tests the efficiency of the new models with Fama-MacBeth two steps method to study whether the two kinds of volatilities should be priced or not in our stock market.At last,this paper compares the new models' testing results with CAPM model and Fama-French three factors model's results.On the basis of the testing results,in the time series level,it can be concluded that the volatility's factor loading size and the volatility's effect on stock portfolio's returns are both related to stocks' market value.Idiosyncratic volatility has positive influence on stock's returns,and growth stocks' coefficients of volatility are greater than value stocks' coefficients of volatility.It shows that growth stocks have more idiosyncratic risks.From the results of cross-section regression,market volatility has positive risk price,but it has no significant influence on stocks returns.However,idiosyncratic volatility has significant and positive effect on stocks returns,and it is the cross-section pricing factor of stocks returns.According to the testing results,CAPM model doesn't match Shanghai stock exchange market and there are some missed pricing factors with the exception of market extra return.Based on the testing results of Fama-French three factor model,we can conclude that market value factor and book market value factor are two significant pricing factors in Shanghai A stock market.And Fama-French three factor model is the best models among the CAPM model and the new models including market and idiosyncratic volatility.The asset pricing model including market volatility improves CAPM model's results a little,however,The asset pricing model including idiosyncratic volatility significantly improves CAPM model's results.In a word,the idiosyncratic volatilities should be included in the capital asset pricing model.