Fear and the Fama‐French Factors |
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| Authors: | Robert B Durand Dominic Lim J Kenton Zumwalt |
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| Institution: | 1. Robert B. Durand is a Professor of Finance at the Department of Finance at Curtin University, Bentley, Western Australia.;2. Dominic Lim is a Postgraduate Research Student in Accounting and Finance at the University of Western Australia, Crawley WA, Australia.;3. J. Kenton Zumwalt is a Professor of Finance in the Department of Finance and Real Estate at Colorado State University, Ft. Collins, CO. |
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| Abstract: | Investors’ expectations of market volatility, captured by the VIX (the Chicago Board Options Exchange's volatility index, also known as the “investor fear gauge”), affects the expected returns of US equities. Changes in the VIX drive variations in the expected returns of the factors included in the Fama and French three‐factor model augmented with a momentum factor. The market risk premium (Rm– Rf) and the value premium (HML) are especially sensitive to changes in the VIX. An increase in expected volatility is associated with flights to quality and increases in estimated required returns. |
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