Quantitative Assessment of Volatility Pricing Factors

Abstract: In this thesis, I perform a quantitative assessment of three volatility pricing factors; market variance (MV), average stock variance (AV), and common idiosyncratic volatility (CIV). I show that the three volatility pricing factors coexist, although the factors exhibit similar time-variation and their innovations are correlated. Exposure to each of them is priced and each of them helps to explain the time-series of returns. My results suggest that AV can serve as a proxy for idiosyncratic volatility if stocks are double-sorted on MV and AV. I further show that the pricing estimates highly vary with the used sample; the strongest effects have been found between 1990 and 2009.