(67) The Effects of Market Volatility on the Excess Returns of Public Equities

The efficient market hypothesis (EMH) continues to be debated by financial economists and practitioners alike. The theory states that the prices of assets must reflect all available information for the market to be efficient... [ view full abstract ]

The efficient market hypothesis (EMH) continues to be debated by financial economists and practitioners alike. The theory states that the prices of assets must reflect all available information for the market to be efficient noting excess returns in the market to be an improbability. This paper addresses the occurrence of excess returns in the stock market for a given portfolio of securities with respect to varying levels of market volatility. The Fama-French 5-Factor Asset Pricing Model is used to estimate a portfolio’s returns based on the invested companies’ market risk, size, value, profitability, and investment patterns. The Volatility Index (VIX) is added to the model to incorporate realized volatility and more accurately measure the effect of volatility on excess returns. As prior literature has shown, an Asymmetric Volatility Phenomenon (AVP) occurs as negative return shocks on the market cause a greater level of market volatility and subsequent decline in asset prices relative to positive return shocks. Thus, excess returns seem more likely to occur during times of market distress as opposed to times of economic stability. For this study, the time period chosen ranges from 2005 to 2015 as means of incorporating the most recent financial crisis of 2008, a period of historically high levels of market volatility and deviation in asset prices.