Chris T. Stivers

Stock Market Uncertainty and the Stock-Bond Return Relation

We examine whether time variation in the comovements of daily stock and Treasury bond returns can be linked to measures of stock market uncertainty, specifically the implied volatility from equity index options and detrended stock turnover. From a forward-looking perspective, we find a negative relation between the uncertainty measures and the future correlation of stock and bond returns. Contemporaneously, we find that bond returns tend to be high (low) relative to stock returns during days when implied volatility increases (decreases) substantially and during days when stock turnover is unexpectedly high (low). Our findings suggest that stock market uncertainty has important cross-market pricing in-fluences and that stock-bond diversification benefits increase with stock market uncertainty.

Stock Returns, Implied Volatility Innovations, and the Asymmetric Volatility Phenomenon

We study the dynamic relation between daily stock returns and daily innovations in optionderived implied volatilities. By simultaneously analyzing innovations in index- and firmlevel implied volatilities, we distinguish between innovations in systematic and idiosyncratic volatility in an effort to better understand the asymmetric volatility phenomenon. Our results indicate that the relation between stock returns and innovations in systematic volatility (idiosyncratic volatility) is substantially negative (near zero). These results suggest that asymmetric volatility is primarily attributed to systematic market-wide factors rather than aggregated firm-level effects. We also present evidence that supports our assumption that innovations in implied volatility are good proxies for innovations in expected stock volatility.

Cross-sectional Return Dispersion and Time-Variation in Value and Momentum Premiums

We find that the market’s recent cross-sectional dispersion in stock returns is positively related to the subsequent value book-to-market premium and negatively related to the subsequent momentum premium. The partial relation between return dispersion (RD) and the subsequent value and momentum premiums remains strong when controlling for macroeconomic state variables suggested by the literature. Our findings are consistent with recent theoretical insights and empirical evidence that suggest that the market’s RD may serve as a leading countercyclical state variable, that the value premium is countercyclical, and that the momentum premium is procyclical.

Firm-level return dispersion and the future volatility of aggregate stock market returns

We find a sizable positive relation between firm return dispersion and future market-level volatility in U.S. monthly equity returns from 1927 to 1995. This intertemporal relation remains strong when controlling for economic conditions and for return shocks in the aggregate stock market, widely-used factor-mimicking portfolios, and government bonds. In contrast, the well-known positive relation between market-return shocks and future market-level volatility largely disappears when controlling for firm return dispersion. We also document how firm return dispersion moves with the contemporaneous market return and with economic conditions. Collectively, our evidence suggests that the time variation in firm return dispersion has important market-wide implications.

Stock Implied Volatility, Stock Turnover, and the Stock-Bond Return Relation

The authors study time-variation in the co-movements between daily stock and Treasury bond returns over 1986 to 2000. Their innovation is to examine whether variation in stock-bond return dynamics can be linked to non-return-based measures of stock market uncertainty, specifically the implied volatility (IV) from equity index options and detrended stock turnover (DTVR). The authors investigate two empirical questions suggested by recent literature on stock market uncertainty and cross-market hedging. First, from a forward-looking perspective, they find that the levels of IV and DTVR are both negatively associated with the future correlation between stock and bond returns. The probability of a negative correlation between daily stock and bond returns over the next month is several times greater following relatively high values of IV and DTVR. Second, from a contemporaneous perspective, the authors find that bond returns tend to be relatively high (low) during days when IV increases (decreases) and during days when stock turnover is unexpectedly high (low). Their findings suggest that stock market uncertainty has cross-market pricing influences that play an important role in understanding joint stock-bond price formation. Further, our results imply that stock-bond diversification benefits increase with stock market uncertainty.

Information Percolation, the 52-Week High, and Short-Term Reversal in Stock Returns

We show that price anchors have a role in understanding short-run reversals in one-month stock returns, in conjunction with the well-known liquidity-provision channel. Specifically, we find that one-month reversal strategies perform much better for stocks that have: (1) a low price, relative to their 52-week high (George and Hwang (2004)); and (2) a low capital-gains-overhang (Grinblatt and Han (2005)). Further, we uncover striking asymmetries in the reversal behavior between past winners and past losers, depending upon the stocks price relative to the price reference points. These reversal asymmetries fit with the hypothesized price-anchoring biases.

Intermediary Asset Pricing and the Nonlinear Relation between Volatility and the Equity Size Premium

Over the 1960-2014 period, we find that the equity size premium is pervasively positive, sizable, and statistically significant solely over periods that follow a high-risk month; defined as a month that ends with the expected market volatility being in its top quintile. Following the other lower-risk months, the size premium is essentially zero and statistically insignificant. Conditional CAPM alphas for Small-minus-Big (SMB) long/short portfolio returns also exhibit a very similar risk-based contingent variation. Our results indicate a nonlinear positive intertemporal risk-return relation for the equity size premium, seemingly attributed to high-risk episodes where small-cap stocks face relatively higher market volatility-, default-, and illiquidity-risk. Our findings suggest support for: (1) Hahn-Lee’s (2006) and Kapadia’s (2011) view that default risk has a role for understanding the size premium, (2) Acharya-Pedersen’s (2005) implication that illiquidity shocks can predict higher future returns, and (3) Ang et al’s (2006) view that stocks with a more negative sensitivity to market volatility innovations should have a higher risk premium.