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Article

Average Stock Variance and Market Returns:
Evidence of Time-Varying Predictability at the
Daily Frequency

Huafeng (Jason) Chen, Hernán Ortiz-Molina and Siliang (Stacy) Zhang
The Journal of Portfolio Management Summer 2011, 37 (4) 86-95; DOI: https://doi.org/10.3905/jpm.2011.37.4.086
Huafeng (Jason) Chen
is an assistant professor of finance in the Sauder School of Business at the University of British Columbia in Vancouver, BC, Canada.
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  • For correspondence: jason.chen@sauder.ubc.ca
Hernán Ortiz-Molina
is an assistant professor of finance in the Sauder School of Business at the University of British Columbia in Vancouver, BC, Canada.
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  • For correspondence: ortizmolina@sauder.ubc.ca
Siliang (Stacy) Zhang
is a M.Sc. student in the Math Department at the University of British Columbia in Vancouver, BC, Canada.
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  • For correspondence: szhang@seaspanltd.ca
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Abstract

Chen, Ortiz-Molina, and Zhang develop a daily measure of average stock variance and study whether it can predict market returns one day ahead. Using a time-invariant prediction model, they find a robust predictive relation between these variables that cannot be used to profitably time the market. A closer look reveals that the strength and even the direction of the predictive relation vary significantly over short periods of time. Moreover, a simple timing strategy that exploits this variation over time significantly outperforms the market buy-and-hold strategy in terms of the mean-variance trade-off. The evidence shows that predictability is stronger during business cycle contractions and that the timing strategy is profitable because it avoids losses during bad times. The evidence also shows that parameter breaks occur very frequently over short periods of time, and not only when the economy switches from one phase of the business cycle to another. The authors’ results suggest that idiosyncratic risk matters in asset pricing and that its effect is time varying.

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The Journal of Portfolio Management: 37 (4)
The Journal of Portfolio Management
Vol. 37, Issue 4
Summer 2011
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Average Stock Variance and Market Returns:
Evidence of Time-Varying Predictability at the
Daily Frequency
Huafeng (Jason) Chen, Hernán Ortiz-Molina, Siliang (Stacy) Zhang
The Journal of Portfolio Management Jul 2011, 37 (4) 86-95; DOI: 10.3905/jpm.2011.37.4.086

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Average Stock Variance and Market Returns:
Evidence of Time-Varying Predictability at the
Daily Frequency
Huafeng (Jason) Chen, Hernán Ortiz-Molina, Siliang (Stacy) Zhang
The Journal of Portfolio Management Jul 2011, 37 (4) 86-95; DOI: 10.3905/jpm.2011.37.4.086
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  • Article
    • Abstract
    • MEASURE OF AVERAGE STOCK VARIANCE AND DATA
    • INITIAL EVIDENCE ASSUMING PARAMETER STABILITY
    • ALLOWING FOR TIME-SERIES VARIATION IN THE PREDICTIVE RELATION
    • PARAMETER INSTABILITY AND THE STATE OF THE ECONOMY
    • CONCLUSIONS
    • REFERENCES
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