Author(s): Huijian Dong, Xiaomin Guo, Shan Ning
Using the bootstrapping method, this study examines the impact of unexpected risk, or risk surprise, on asset returns and trade volumes. We use the daily data of the Russell 3000 Index constituents to obtain 2,092 sets of unexpected risks from individual AR (1) regressions. These unexpected risks and their lagged values then prompt regressions with asset returns as well as trade volumes to test the market reactions to risk surprises. We find that the lagged unexpected risks affect the current asset returns 60% of the time, with 98% significant negative impacts. Higher risk surprises from the previous term suppress the returns at the current term. We also provide evidence that the unexpected risks are less related to trade volume. Yet among the significant regressions, in most instances, higher unexpected risk triggers and amplifies the current trade activities, but discourages the future density of transactions.