Beta and size equity premia following a high-VIX threshold

Abstract

We show that a positive risk premium from holding high-beta stocks (vs. low-beta stocks) and small-cap stocks (vs. large-cap stocks) is reliably earned only after the expected stock-market volatility breaches a high threshold at about the 80th percentile. When exceeding this threshold at month 𝑡−1, then sizable positive average returns from beta and size exposure are persistently evident over months 𝑡+1 to 𝑡+6; otherwise the premia are near zero. Conversely, we find no comparable threshold behavior for the Fama–French HML, RMW, and CMA factors. Our investigation suggests several economic channels as likely contributors behind these threshold risk-return findings.