Fear and the Fama-French Factors


  • The authors would like to thank Bill Christie (Editor) and an anonymous reviewer for their helpful comments and suggestions. We would also like to thank John Elder, John Watson, and seminar participants at the Financial Management Association/Asian Finance Association Conference (Hong Kong), Colorado State University, and the University of Queensland for their useful feedback on earlier versions of the paper.


Investors’ expectations of market volatility, captured by the VIX (the Chicago Board Options Exchange's volatility index, also known as the “investor fear gauge”), affects the expected returns of US equities. Changes in the VIX drive variations in the expected returns of the factors included in theFama and Frenchthree-factor model augmented with a momentum factor. The market risk premium (Rm– Rf) and the value premium (HML) are especially sensitive to changes in the VIX. An increase in expected volatility is associated with flights to quality and increases in estimated required returns.