The Relationship between Volatility and Expected Returns:Some Evidence for Australia

Abstract

We explore the intertemporal relation between the conditional mean and the conditional variance of industry portfolio returns and the Fama-French 25 size/book-tomarket portfolio returns using data from Australia. We estimate the portfolio conditional covariance with the market and test whether it can predict the time-variation in the portfolio expected returns. We find strong and consistent evidence of a positive risk aversion_x000D_ relation, implying that the market returns do carry a positive risk premium in the Australian_x000D_ market. Our results suggest that the value factor is relevant for determining the variation of_x000D_ asset returns on both the industry portfolios and the size/book-to-market portfolios.