TIME VARIATIONS AND COVARIATIONS IN THE EXPECTATION AND VOLATILITY OFSTOCK-MARKET RETURNS

This article investigates empirically the comovements of the condition al mean and volatility of stock returns. It extends the results in the literature by demonstrating the role of the commercial paper-Treasury yield spread in predicting time variation in volatility. The conditio nal mean and volatility exhibit an asymmetric relation, which contrast s with the contemporaneous relation that has been tested previously. T he volatility leads the expected return, and this time series relation is documented using offset correlations,short-horizon contemporaneous correlations, and a vector autoregression. These results bring into q uestion the value of modeling expected returns as a constant function of conditional volatility.