Aggregate volatility risk and the cross-section of stock returns: Australian evidence

• Aggregate volatility risk is negatively related to the cross-section of stock returns.
• The relation only exists when market volatility is increasing.
• The asymmetric effect is persistent and robust to other characteristics.
• Aggregate volatility risk is negatively priced in months with increasing market volatility.

This study examines the relation between aggregate volatility risk and the cross-section of stock returns in Australia. We use a stock's sensitivity to innovations in the ASX200 implied volatility (VIX) as a proxy for aggregate volatility risk. Consistent with theoretical predictions, aggregate volatility risk is negatively related to the cross-section of stock returns only when market volatility is rising. The asymmetric volatility effect is persistent throughout the sample period and is robust after controlling for size, book-to-market, momentum, and liquidity issues. There is some evidence that aggregate volatility risk is a priced factor, especially in months with increasing market volatility.