On the robustness of the positive relation between expected idiosyncratic volatility and expected return

My 2009 JFE paper ["Idiosyncratic Risk and the Cross-Section of Expected Stock Returns', Journal of Financial Economics, Vol. 91, pp. 24-37] documents a positive and statistically significant cross-sectional relation between expected idiosyncratic volatility (E(IVOL)) and expected stock re...

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Main Author: FU, Fangjian
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Language:English
Published: Institutional Knowledge at Singapore Management University 2010
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Online Access:https://ink.library.smu.edu.sg/lkcsb_research/5290
https://ink.library.smu.edu.sg/context/lkcsb_research/article/6289/viewcontent/SSRN_id1742171.pdf
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spelling sg-smu-ink.lkcsb_research-62892017-09-21T08:25:41Z On the robustness of the positive relation between expected idiosyncratic volatility and expected return FU, Fangjian My 2009 JFE paper ["Idiosyncratic Risk and the Cross-Section of Expected Stock Returns', Journal of Financial Economics, Vol. 91, pp. 24-37] documents a positive and statistically significant cross-sectional relation between expected idiosyncratic volatility (E(IVOL)) and expected stock return. A recent working paper titled "On the Relation between EGARCH Idiosyncratic Volatility and Expected Stock Returns" by Guo, Ferguson, and Kassa of University of Cincinnati suggests that the positive relation is driven by an in-sample approach to estimate E(IVOL). They fail to find a significant relation between return and their E(IVOL) estimated out of sample. I find that two estimation settings in their SAS code, one of which limits the maximum number of iterations and the other accepts estimates with a questionable convergence status, lead to potentially unreliable estimates and ultimately, the failure to find the positive relation between return and E(IVOL). Using more reliable settings, I re-estimate E(IVOL) strictly out of sample, and confirm a robust and significantly positive relation between return and E(IVOL), just as reported in my JFE paper. 2010-12-01T08:00:00Z text application/pdf https://ink.library.smu.edu.sg/lkcsb_research/5290 info:doi/10.2139/ssrn.1742171 https://ink.library.smu.edu.sg/context/lkcsb_research/article/6289/viewcontent/SSRN_id1742171.pdf http://creativecommons.org/licenses/by-nc-nd/4.0/ Research Collection Lee Kong Chian School Of Business eng Institutional Knowledge at Singapore Management University Idiosyncratic Volatility Expected Idiosyncratic Volatility EGARCH Finance
institution Singapore Management University
building SMU Libraries
continent Asia
country Singapore
Singapore
content_provider SMU Libraries
collection InK@SMU
language English
topic Idiosyncratic Volatility
Expected Idiosyncratic Volatility
EGARCH
Finance
spellingShingle Idiosyncratic Volatility
Expected Idiosyncratic Volatility
EGARCH
Finance
FU, Fangjian
On the robustness of the positive relation between expected idiosyncratic volatility and expected return
description My 2009 JFE paper ["Idiosyncratic Risk and the Cross-Section of Expected Stock Returns', Journal of Financial Economics, Vol. 91, pp. 24-37] documents a positive and statistically significant cross-sectional relation between expected idiosyncratic volatility (E(IVOL)) and expected stock return. A recent working paper titled "On the Relation between EGARCH Idiosyncratic Volatility and Expected Stock Returns" by Guo, Ferguson, and Kassa of University of Cincinnati suggests that the positive relation is driven by an in-sample approach to estimate E(IVOL). They fail to find a significant relation between return and their E(IVOL) estimated out of sample. I find that two estimation settings in their SAS code, one of which limits the maximum number of iterations and the other accepts estimates with a questionable convergence status, lead to potentially unreliable estimates and ultimately, the failure to find the positive relation between return and E(IVOL). Using more reliable settings, I re-estimate E(IVOL) strictly out of sample, and confirm a robust and significantly positive relation between return and E(IVOL), just as reported in my JFE paper.
format text
author FU, Fangjian
author_facet FU, Fangjian
author_sort FU, Fangjian
title On the robustness of the positive relation between expected idiosyncratic volatility and expected return
title_short On the robustness of the positive relation between expected idiosyncratic volatility and expected return
title_full On the robustness of the positive relation between expected idiosyncratic volatility and expected return
title_fullStr On the robustness of the positive relation between expected idiosyncratic volatility and expected return
title_full_unstemmed On the robustness of the positive relation between expected idiosyncratic volatility and expected return
title_sort on the robustness of the positive relation between expected idiosyncratic volatility and expected return
publisher Institutional Knowledge at Singapore Management University
publishDate 2010
url https://ink.library.smu.edu.sg/lkcsb_research/5290
https://ink.library.smu.edu.sg/context/lkcsb_research/article/6289/viewcontent/SSRN_id1742171.pdf
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