Stern School of Business, New York University. I would like to thank Kobi Boudoukh, Allan Kleidon, Ken Singleton, the editor, René Stulz, an anonymous referee, and seminar participants at the University of British Columbia, Carnegie-Mellon University, Harvard University, London Business School, New York University, Northwestern University, the University of Pennsylvania, Stanford University, and the University of Texas, Austin for helpful comments.
Time Variations and Covariations in the Expectation and Volatility of Stock Market Returns
Article first published online: 30 APR 2012
1994 The American Finance Association
The Journal of Finance
Volume 49, Issue 2, pages 515–541, June 1994
How to Cite
WHITELAW, R. F. (1994), Time Variations and Covariations in the Expectation and Volatility of Stock Market Returns. The Journal of Finance, 49: 515–541. doi: 10.1111/j.1540-6261.1994.tb05150.x
- Issue published online: 30 APR 2012
- Article first published online: 30 APR 2012
This article investigates empirically the comovements of the conditional mean and volatility of stock returns. It extends the results in the literature by demonstrating the role of the commercial paper-Treasury yield spread in predicting time variation in volatility. The conditional mean and volatility exhibit an asymmetric relation, which contrasts with the contemporaneous relation that has been tested previously. The volatility leads the expected return, and this time series relation is documented using offset correlations, short-horizon contemporaneous correlations, and a vector autoregression. These results bring into question the value of modeling expected returns as a constant function of conditional volatility.