Can Volatility Predict Return

The intertemporal capital asset pricing model(ICAPM)relaxed the assumption of traditional CAPM.ICAPM believes that the return of capital is not only determined by market risk,but also depends on the risk of investment opportunities.The prediction of return rate can be transformed into the measurement of investment opportunity risk in market risk history.This paper uses the value premium as the proxy variable of investment opportunity,and uses the ICAPM model to predict the return rate.Value premium is the income from buying value stocks and short selling growth stocks.A large number of paper proves that value premium exists in the stock market.In 13 developed countries or regions,the value portfolio has significantly higher yield than the development portfolio.Other scholars believe that value premium is an important manifestation of investment opportunities.If the value premium is regarded as the proxy variable of investment opportunity,then according to ICAPM,the yield should be determined by the fluctuation of market and value premium.Because there is a relationship between cross-section and the predictability of return on time series,this paper conjectures that the volatility of market volatility and value premium can jointly predict stock return.In the past,most studies used book to market ratio as a variable to distinguish value stocks and growth stocks,so the value premium obtained in this way is generally reflected in the yield prediction.This paper speculates that this is caused by the characteristics of the Chinese market.In the study of the Chinese stock market,the calculation method of value premium needs to be changed.Considering the strict IPO system of China's stock market,"shell pollution,may be more serious in China,especially in small market value stocks.Therefore,in the construction of value premium,this paper first removes the 30%stock with the smallest market value.In the choice of variables to distinguish value shares and growth shares,this paper uses the income to market ratio to replace the book to market ratio.The value premium thus constructed is more suitable for the Chinese market.This paper uses stock market volatility and value premium volatility on time series to jointly predict stock market returns.The results show that the market volatility can predict the market return in the next period when controlling the value premium volatility,and the coefficient is significantly positive.After controlling market indexes such as turnover rate,idiosyncratic volatility and objective economic indexes such as inflation rate and international oil price volatility,the results are still stable,and the results outside the sample show that the prediction effect is obvious.This result proves that ICAPM is established in China's stock market and there is a positive risk return relationship in China's stock market.The significance and innovation of this paper lies in(1)in the selection of samples,most of the research on risk-benefit trade-off in China's stock market focuses on the analysis of cross-sectional data.This paper is a rare research on cross-sectional risk-benefit trade-off in time series of China's stock market.(2)this paper adopts a new method to calculate the value premium and applies it to the empirical study of ICAPM model.It has certain significance for the construction and measurement of factors and the measurement of investment opportunities.