The fourth empirical nding is the fact that the di¤erent volatility factors are due to systematic risk, and therefore are priced in the cross section of stock returns. In a recent contribution, Adrian and Rosenberg (2008) show that volatility factor models compare favorably to benchmark models in explaining the cross section of stock returns. While the statistical knowledge of stock return volatility is impressive, several questions remain regarding their economic explanation. For example, why does stock return volatility cluster? why is it that stock return volatility is composed of several factors? what do these factors represent? why do they matter in the cross section of stock returns?.
