The paper shows that lottery-like stocks are hedges against unexpected increases in market volatility. The loading on the aggregate volatility risk factor explains low returns to stocks with high maximum returns in the past (Bali, Cakici, and Whitelaw, 2011) and high expected skewness (Boyer,...

The idiosyncratic volatility effect of Ang et al. (2006) is robust to restricting the sample to NYSE firms (once proper listing indicator is used) and to excluding from the sample small, illiquid, and low-price stocks. The idiosyncratic volatility effect is also unlikely to stem from the...

Firms with lower profitability have lower expected returns because such firms perform better than expected when market volatility increases. The better-than-expected performance arises because unprofitable firms are distressed and volatile, their equity resembles a call option on the assets, and...