ON THE RELATION BETWEEN THE EXPECTED VALUE AND THE VOLATILITY OF THE NOMINAL EXCESS RETURN ON STOCKS

We find support for a negative relation between conditional expected m onthly return and conditional variance of monthly return, using a GARC H-M model modified by allowing (1) seasonal patterns in volatility, (2 ) positive and negative innovations to returns having different impact s on conditional volatility, and (3) nominal interest rates to predict conditional variance. Using the modified GARCH-M model, we also show that monthly conditional volatility may not be as persistent as was th ought. Positive unanticipated returns appear to result in a downward r evision of the conditional volatility whereas negative unanticipated r eturns result in an upward revision of conditional volatility.