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.