Idiosyncratic Volatility Matters for the Cross-Section of Returns— in More Ways Than One!

This article re-examines the relationship between idiosyncratic volatility and the cross-section of stock returns. Previous studies, using total realized returns as proxies for expected returns, have found ambiguous and conflicting relationships between expected idiosyncratic volatility and expected...

Full description

Saved in:
Bibliographic Details
Main Authors: CHUA, Choong Tze, GOH, Choo Yong, Jeremy, ZHANG, Zhe (Joe)
Format: text
Language:English
Published: Institutional Knowledge at Singapore Management University 2006
Subjects:
Online Access:https://ink.library.smu.edu.sg/lkcsb_research/1074
Tags: Add Tag
No Tags, Be the first to tag this record!
Institution: Singapore Management University
Language: English
id sg-smu-ink.lkcsb_research-2073
record_format dspace
spelling sg-smu-ink.lkcsb_research-20732010-09-23T06:24:04Z Idiosyncratic Volatility Matters for the Cross-Section of Returns— in More Ways Than One! CHUA, Choong Tze GOH, Choo Yong, Jeremy ZHANG, Zhe (Joe) This article re-examines the relationship between idiosyncratic volatility and the cross-section of stock returns. Previous studies, using total realized returns as proxies for expected returns, have found ambiguous and conflicting relationships between expected idiosyncratic volatility and expected returns. We decompose idiosyncratic volatility into expected and unexpected idiosyncratic volatility, and use unexpected idiosyncratic volatility to control for unexpected returns so that the relationship between expected returns and expected idiosyncratic volatility can be observed with more clarity. We find expected idiosyncratic volatility to be significantly and positively related to expected returns. In addition, we find evidence suggesting that unexpected idiosyncratic volatility is positively related to unexpected returns and that this relationship is consistent with the option effect proposed by Merton (1974). 2006-07-01T07:00:00Z text https://ink.library.smu.edu.sg/lkcsb_research/1074 Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University Finance and Financial Management Portfolio and Security Analysis
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Finance and Financial Management
Portfolio and Security Analysis
spellingShingle Finance and Financial Management
Portfolio and Security Analysis
CHUA, Choong Tze
GOH, Choo Yong, Jeremy
ZHANG, Zhe (Joe)
Idiosyncratic Volatility Matters for the Cross-Section of Returns— in More Ways Than One!
description This article re-examines the relationship between idiosyncratic volatility and the cross-section of stock returns. Previous studies, using total realized returns as proxies for expected returns, have found ambiguous and conflicting relationships between expected idiosyncratic volatility and expected returns. We decompose idiosyncratic volatility into expected and unexpected idiosyncratic volatility, and use unexpected idiosyncratic volatility to control for unexpected returns so that the relationship between expected returns and expected idiosyncratic volatility can be observed with more clarity. We find expected idiosyncratic volatility to be significantly and positively related to expected returns. In addition, we find evidence suggesting that unexpected idiosyncratic volatility is positively related to unexpected returns and that this relationship is consistent with the option effect proposed by Merton (1974).
format text
author CHUA, Choong Tze
GOH, Choo Yong, Jeremy
ZHANG, Zhe (Joe)
author_facet CHUA, Choong Tze
GOH, Choo Yong, Jeremy
ZHANG, Zhe (Joe)
author_sort CHUA, Choong Tze
title Idiosyncratic Volatility Matters for the Cross-Section of Returns— in More Ways Than One!
title_short Idiosyncratic Volatility Matters for the Cross-Section of Returns— in More Ways Than One!
title_full Idiosyncratic Volatility Matters for the Cross-Section of Returns— in More Ways Than One!
title_fullStr Idiosyncratic Volatility Matters for the Cross-Section of Returns— in More Ways Than One!
title_full_unstemmed Idiosyncratic Volatility Matters for the Cross-Section of Returns— in More Ways Than One!
title_sort idiosyncratic volatility matters for the cross-section of returns— in more ways than one!
publisher Institutional Knowledge at Singapore Management University
publishDate 2006
url https://ink.library.smu.edu.sg/lkcsb_research/1074
_version_ 1770569787208892416