TY  - JOUR
AU  - Brandt,Michael W.
AU  - Kang,Qiang
TI  - On the Relationship Between the Conditional Mean and Volatility of Stock Returns: A Latent VAR Approach
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 9056
PY  - 2002
Y2  - July 2002
UR  - http://www.nber.org/papers/w9056
L1  - http://www.nber.org/papers/w9056.pdf
N1  - Author contact info:
Michael W. Brandt
Fuqua School of Business
Duke University
One Towerview Drive
Durham, NC  27708
Tel: 919/660-1948
Fax: 919/660-8038
E-Mail: mbrandt@duke.edu

Qiang Kang
School of Business
University of Miami
Coral Gables, FL 33124-6552
E-Mail: q.kang@miami.edu
AB  - We model the conditional mean and volatility of stock returns as a latent vector autoregressive (VAR) process to study the contemporaneous and intertemporal relationship between expected returns and risk in a flexible statistical framework and without relying on exogenous predictors. We find a strong and robust negative correlation between the innovations to the conditional moments that leads to pronounced counter-cyclical variation in the Sharpe ratio. We document significant lead-lag correlations between the conditional moments that also appear related to business cycles. Finally, we show that although the conditional correlation between the mean and volatility is negative, the unconditional correlation is positive due to the lead-lag correlations.
ER  -