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One Vol to Rule Them All: Common Volatility Dynamics in Factor Returns
Resource type
Authors/contributors
- Kapadia, Nishad (Author)
- Linn, Matthew (Author)
- Paye, Bradley (Author)
Title
One Vol to Rule Them All: Common Volatility Dynamics in Factor Returns
Abstract
We show that a common component governs volatility dynamics across a wide range of traded equity factors. This “common factor volatility” (CFV) exists even among orthogonal factors. CFV occurs in both cash-flow and discount-rate components of factor returns and derives from market responses to fundamental news rather than underlying commonality in news volatility. Incorporating CFV improves factor volatility forecasts relative to models that include only own-factor volatility. CFV allows us to characterize stochastic discount factor (SDF) volatility dynamics in a very general sense and we show that many popular models imply SDFs with time-varying volatility that correlates strongly with CFV.
Publication
Journal of Financial and Quantitative Analysis
Volume
59
Issue
3
Pages
1185-1212
Date
2024/05
Language
en
ISSN
0022-1090, 1756-6916
Short Title
One Vol to Rule Them All
Accessed
6/17/24, 9:33 AM
Library Catalog
Cambridge University Press
Citation
Kapadia, N., Linn, M., & Paye, B. (2024). One Vol to Rule Them All: Common Volatility Dynamics in Factor Returns. Journal of Financial and Quantitative Analysis, 59, 1185–1212.
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