Market Volatility Risk and Stock Returns around the World: Implication for Multinational Corporations*

We investigate the pricing of market volatility risk as a risk factor-the innovation risk and as a characteristic risk-the level risk. We find that the pricing of the country-level (local) market volatility risk factor is not robust across 21 developed markets and that the global market volatility risk factor prices 21 developed market portfolios after controlling for global market, value, and size factors. Capturing various market information, idiosyncratic market volatility as a country-specific characteristic risk dominates global market, value, size, and market volatility risk factors in predicting returns of market portfolios. Countries with higher investor protection and accounting standards have higher country-specific market volatility. Market volatility is higher in these countries because corporate managers take higher risks on innovative projects that benefit economic growth.