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Research Details

Accounting-Based Equity Valuation and Returns on Equity Volatility

Abstract

The same firm characteristics that help explain cross-sectional variation in expected stock returns, such as size, book-to-market and the earnings yield, also help explain cross-sectional variation in returns to trading in option-implied stock return volatility. This empirical phenomenon is shown to arise within a tractable accounting-based valuation model that allows for risk aversion and stochastic earnings volatility. The model predicts that expected stock (stock return volatility) returns are positively (negatively) related to a combination of the inverse of size, book-to-market, the earnings yield, and the dividend yield. These predictions are strongly supported using a variety of empirical specifications. The model provides a framework for jointly investing in stocks and options, and the findings highlight the ability of accounting-based valuation models to explain price dynamics across stock and volatility markets.

Type

Working Paper

Author(s)

Matthew Lyle

Date Published

2020

Citations

Lyle, Matthew. 2020. Accounting-Based Equity Valuation and Returns on Equity Volatility.

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