THE JOURNAL OF FINANCE • VOL. LXI, NO. 1 • FEBRUARY 2006

The Cross-Section of Volatility and Expected Returns

ANDREW ANG, ROBERT J. HODRICK, YUHANG XING, and XIAOYAN ZHANG

ABSTRACT

We examine the pricing of aggregate volatility risk in the cross-section of stock returns.Consistent with theory, we find that stocks with high sensitivities to innovations in aggregate volatility have low average returns. Stocks with high idiosyncratic volatility relative to the Fama and French (1993, Journal of Financial Economics 25, 2349) model have abysmally low average returns. This phenomenon cannot be explained by exposure to aggregate volatility risk. Size, book-to-market, momentum, and liquidity effects cannot account for either the low average returns earned by stocks with high exposure to systematic volatility risk or for the low average returns of stocks with high idiosyncratic volatility.