We find support for a negative relation between conditional expected monthly return and conditional variance of monthly return, using a GARCH-M model modified by allowing (i) seasonal patterns in volatility, (ii) positive and negative innovations to returns having different impacts on conditional volatility, and (iii) nominal interest rates to predict conditional variance. Using the modified GARCH-M model, we also show that monthly conditional volatility may not be as persistent as was thought. Positive unanticipated returns appear to result in a downward revision of the conditional volatility whereas negative unanticipated returns result in an upward revision of conditional volatility.
Published in: _Journal of Finance_ (Vol. 48, No. 5, December 1993, pp. 1779-1801) https://doi.org/10.1111/j.1540-6261.1993.tb05128.x.