Does Higher Ex-Ante Volatility Predict Higher Subsequent Monthly Excess Returns?

Abstract

This study examines whether a higher ex-ante volatility of large‑capitalization United States stocks higher monthly excess returns. By using monthly stock data for Standard & Poor's 500 (S&P 500) companies from 2015 to 2024, the study measures ex-ante volatility as the annualized standard deviation of each stock's previous 12 months of returns. The dependent variable is the excess return of the next month, and the Fama-French market excess return is added as a control for general market fluctuations. Based on the above results, volatility has a weak but positive effect on future excess returns. Stocks with higher ex-ante volatility have generated higher average monthly excess returns, but this positive correlation is no longer statistically significant after controlling for systematic market risk. Period analysis shows that the above relationship is not always the case. Volatility has little independent predictive power before the public health event. During the public health event, the association between volatility and the future excess return is much stronger and still significantly positive after controlling for the Fama-French market excess return. The effect is still positive but has decreased. Therefore, based on the above data, volatility may offer a higher risk premium in times of financial instability.