We theoretically establish a market microstructure bias embedded in the estimate of industry-adjusted idiosyncratic variance and empirically show that the bid-ask spread eliminates the observed time trend in aggregate idiosyncratic variance (Campbell, Lettau, Malkiel, and Xu, 2001). These...

This paper models a market microstructure bias, driven by the bid-ask spread, that is evident in the pricing of aggregate firm-level risk embodied by the stock return variance estimates of Goyal and Santa-Clara (2003). Controlling for this bias, we find no pricing ability for aggregate...

This paper investigates whether beta can predict the expected return after controlling for the beta instability resulting from shift in the covariance structure. Such a shift is primarily due to noise investors chasing stocks with high idiosyncratic volatility. Consequently, these stocks tend to...

In this paper we show that the failure of the CAPM beta to predict individual stocks' expected returns documented by Fama and French (1992) is largely driven by a small group of stocks with large betas and high idiosyncratic volatilities. These stocks' betas tend to reverse. Therefore, even when...

We develop an extended mean-variance model to investigate the relationship between variance risk premia (VRP) and expected futures returns in the commodity market. In the presence of stochastic variance, commodity producers trade both futures and options to hedge their exposure to commodity...

We survey the recent academic literature that uses option-implied information to construct equity portfolios. Studies show that equity managers can earn a positive alpha by using information in individual equity options, by using stocks' exposure to information in market index options, and by...

After the financialization of commodity futures markets in 2004-05 oil volatility has become a strong predictor of returns and volatility of the overall stock market. Furthermore, stocks' exposure to oil volatility risk now drives the cross-section of expected returns. The difference in average...

Both large oil price increases and decreases are associated with deteriorating economic conditions. Consistent with this stylized fact, we find that the projection of the state price density (SPD) on oil returns estimated from oil futures and option prices displays a U-shaped pattern. Because...

We show that institutional ownership in equity mutual funds predicts fund performance. Our measure of institutional ownership in mutual funds is directly from institutions' quarterly 13(f) filings so it provides a broader coverage of institutional investment in mutual funds than existing...