Ang, Hodrick, Xing, and Zhang (2006) examine the pricing of aggregate volatility risk and idiosyncratic risk in the US equity market. As part of that study, they propose an ex post factor, F V IX, which is intended as a proxy for aggregate volatility risk at a monthly horizon. Their test validating F V IX as a proxy regresses portfolio excess returns on F V IX and other independent variables over the data period 1986-2000. October 1987 is an outlier, in which the independent variable F V IX exhibits a 26σ deviation from its mean over the data period. The inclusion of a large outlier value of an independent variable results in a spurious reduction of the standard error in a regression, in this case by more than a factor of 2. We find that the statistical significance of their tests of F V IX as a proxy disappears when October 1987 is removed from the data set.
July 2, 2012
2012 Working Papers