Is volatility risk priced after all? Some disconfirming evidence

Recent theory and evidence from US studies suggest that aggregate market volatility risk is a strong candidate for inclusion in the list of risk factors that earn a risk premium in equilibrium. We re-examine the sensitivity of stock returns to volatility risk using delta-neutral index option straddles to proxy for innovations in aggregate volatility. Contrary to existing US evidence, our analysis finds little evidence that volatility risk is priced in Australian equities. This finding is robust across a variety of methods for characterizing the underlying volatility factor.