Persistence of ex-ante volatility and the cross-section of stock returns

We suggest a new measure of total ex-ante volatility (EAV) in stock returns, which includes traditional non-market (or idiosyncratic) risk and the unexpected component of market return. We find that the portfolio-level EAV measure exhibits strong predictive power for the cross-section of average returns during the post-1963 period. We demonstrate that (1) the persistence of EAV gives rise to economically significant spread in returns between value and growth stocks, and (2) the cross-sectional dispersion in stock returns is positively related to the estimated value of EAV. The benefit of the EAV measure is that it is countercyclical and contains relevant information about the time-variation in value premium.