scholarly journals The cross-section of expected stock returns and components of idiosyncratic volatility

2021 ◽  
Author(s):  
◽  
Seyed Reza Tabatabaei Poudeh
Keyword(s):  
Risk Factors ◽  
Stock Returns ◽  
Cross Section ◽  
Idiosyncratic Volatility ◽  
Firm Level ◽  
Cross Sectional ◽  
Expected Stock Returns ◽  
Book To Market Ratio ◽  
Alpha Risk ◽  
The Relationship

We examine the relationship between stock returns and components of idiosyncratic volatility—two volatility and two covariance terms— derived from the decomposition of stock returns variance. The portfolio analysis result shows that volatility terms are negatively related to expected stock returns. On the contrary, covariance terms have positive relationships with expected stock returns at the portfolio level. These relationships are robust to controlling for risk factors such as size, book-to-market ratio, momentum, volume, and turnover. Furthermore, the results of Fama-MacBeth cross-sectional regression show that only alpha risk can explain variations in stock returns at the firm level. Another finding is that when volatility and covariance terms are excluded from idiosyncratic volatility, the relation between idiosyncratic volatility and stock returns becomes weak at the portfolio level and disappears at the firm level.

Idiosyncratic Volatility and the Cross Section of Expected Returns

2008 ◽  
Vol 43 (1) ◽  
pp. 29-58 ◽  
Author(s):  
Turan G. Bali ◽  
Nusret Cakici
Keyword(s):  
Stock Returns ◽  
Cross Section ◽  
Idiosyncratic Volatility ◽  
Expected Returns ◽  
Cross Sectional ◽  
Monthly Data ◽  
Portfolio Returns ◽  
Expected Stock Returns ◽  
The Cross ◽  
Data Frequency

AbstractThis paper examines the cross-sectional relation between idiosyncratic volatility and expected stock returns. The results indicate that i) the data frequency used to estimate idiosyncratic volatility, ii) the weighting scheme used to compute average portfolio returns, iii) the breakpoints utilized to sort stocks into quintile portfolios, and iv) using a screen for size, price, and liquidity play critical roles in determining the existence and significance of a relation between idiosyncratic risk and the cross section of expected returns. Portfoliolevel analyses based on two different measures of idiosyncratic volatility (estimated using daily and monthly data), three weighting schemes (value-weighted, equal-weighted, inverse volatility-weighted), three breakpoints (CRSP, NYSE, equal market share), and two different samples (NYSE/AMEX/NASDAQ and NYSE) indicate that no robustly significant relation exists between idiosyncratic volatility and expected returns.

Predicting Equity Returns in Developed Markets

2021 ◽  
pp. 68-90
Author(s):  
A. Doruk Günaydin
Keyword(s):  
Stock Returns ◽  
Cross Section ◽  
Developed Countries ◽  
Equity Returns ◽  
Market Returns ◽  
Short Term ◽  
Firm Level ◽  
Cross Sectional ◽  
Expected Stock Returns ◽  
The Cross

This chapter examines the relation between various firm-specific variables and the cross-section of equity returns in 26 developed countries. Univariate portfolio analyses using equal-weighted returns show that low beta, book-to-market equity, and momentum analysis are also priced in the cross-section of developed market returns, whereas short-term reversal and downside beta manifest themselves in the opposite direction. Univariate portfolio analysis based on value-weighted returns reveal that the predictive power of book-to-market equity and short-term reversal is driven by small stocks. Multivariate firm-level cross-sectional regression analysis document that momentum, short-term reversal, illiquidity, idiosyncratic volatility, hybrid tail risk, lower partial moment are related to expected stock returns. Overall, the most robust cross-sectional predictor in developed market is found to be return momentum.

scholarly journals Idiosyncratic Volatility and Cross-section of Stock Returns: Evidences from India

2016 ◽  
Vol 8 (1) ◽  
pp. 1
Author(s):  
Prashant Sharma ◽  
Brajesh Kumar
Keyword(s):  
Stock Returns ◽  
Cross Section ◽  
Empirical Relationship ◽  
Idiosyncratic Volatility ◽  
Expected Returns ◽  
Cross Sectional ◽  
The Cross ◽  
Highly Correlated ◽  
Indian Stock Market ◽  
The Relationship

<p>The present study examines the cross-sectional pricing ability of idiosyncratic volatility (IV) in Indian stock market and investigates the relationship amongst expected idiosyncratic volatility (EI), unexpected idiosyncratic volatility (UI), and cross-section of stocks returns. The study uses ARIMA (2, 0, 1) model to IV into EI and UI. The stocks returns are regressed on IV, EI and UI using Newey-West (1987) corrections, in order to investigate their empirical relationship.  The study finds that IV is positively related with stock returns. Further the IV significantly explains the cross-section of stock returns in Indian context. After imposing control over UI, as it is highly correlated with unexpected returns, the inter-temporal relationship between EI and expected returns turns out to be positive.</p>

scholarly journals The Cross-Section of Expected Stock Returns in Brazil

2016 ◽  
Vol 14 (2) ◽  
pp. 151
Author(s):  
Gyorgy Varga ◽  
Ricardo Dias de Oliveira Brito
Keyword(s):  
Risk Factors ◽  
Stock Market ◽  
Stock Returns ◽  
Cross Section ◽  
Explanatory Power ◽  
Positive Relation ◽  
Cross Sectional ◽  
Expected Stock Returns ◽  
The Cross

In a sample of the Brazilian stock market from 1999 to 2015, this paper shows that the book-to-market and momentum of individual firms capture some of the cross-sectional variation in average stock returns, while the market β and size do not play a role. The positive relation of cross-section of returns with book-to-market is more evident earlier, while the positive relation with momentum is stronger later in the sample. However, because none of these characteristics show explanatory power for all the subsamples studied, we are not fully convinced that they capture fundamental risk factors.

The Determinants of Idiosyncratic Volatility

2017 ◽  
Vol 25 (4) ◽  
pp. 509-545
Author(s):  
Jaeuk Khil ◽  
Song Hee Kim ◽  
Eun Jung Lee
Keyword(s):  
Growth Rate ◽  
Time Series ◽  
Cross Section ◽  
Growth Rates ◽  
Idiosyncratic Volatility ◽  
Return Volatility ◽  
Firm Level ◽  
Cross Sectional ◽  
Asset Growth ◽  
The Cross

We investigate the cross-sectional and time-series determinants of idiosyncratic volatility in the Korean market. In particular, we focus on the empirical relation between firms’ asset growth rate and idiosyncratic stock return volatility. We find that, in the cross-section, companies with high idiosyncratic volatility tend to be small and highly leveraged, have high variance of ROE and Market to Book ratio, high turnover rate, and pay no dividends. Furthermore, firms with extreme (either high positive or negative) asset growth rates have high idiosyncratic return volatility than firms with moderate growth rates, suggesting the V-shaped relation between asset growth rate and idiosyncratic return volatility. We find that the V-shaped relation is robust even after controlling for other factors. In time-series, we find that firm-level idiosyncratic volatility is positively related to the dispersion of the cross-sectional asset growth rates. As a result, this study is contributed to show that the asset growth is the most important predictor of firm-level idiosyncratic return volatility in both the cross-section and the time-series in the Korean stock market. In addition, we show how the effect of risk factors varies with industries.

Asset growth and the cross-section of stock returns: evidence from Greek listed firms

2017 ◽  
Vol 55 (5) ◽  
pp. 826-841 ◽  
Author(s):  
Georgios Constantinou ◽  
Angeliki Karali ◽  
Georgios Papanastasopoulos
Keyword(s):  
Stock Returns ◽  
Emerging Market ◽  
Balance Sheet ◽  
Firm Level ◽  
Cross Sectional ◽  
Content Type ◽  
Listed Firms ◽  
Asset Growth ◽  
Book To Market Ratio ◽  
Investment Growth

Purpose The purpose of this paper is to examine whether firm-level asset investment effects in returns found for US firms occur within the Greek stock market. Design/methodology/approach The paper utilizes portfolio-level tests and cross-sectional regressions. Findings The authors find that growth in total assets is strongly negatively related to future stock returns of Greek firms. In fact, the relation remains statistically significant, even when the authors control for other strong predictors of future returns (i.e. market capitalization and book-to-market ratio). Furthermore, the authors find that a hedge trading strategy on asset growth rate consisting of a long (short) position in firms with low (high) balance sheet growth generates positive returns, confirming that investment growth has significant predictive power for future returns of Greek listed firms. Originality/value The paper adds to the literature on the generalization of asset pricing regularities attributable to accounting figures in an emerging market.

scholarly journals A Model-Free Measure of Aggregate Idiosyncratic Volatility and the Prediction of Market Returns

2014 ◽  
Vol 49 (5-6) ◽  
pp. 1133-1165 ◽  
Author(s):  
René Garcia ◽  
Daniel Mantilla-García ◽  
Lionel Martellini
Keyword(s):  
Stock Returns ◽  
Cross Section ◽  
Strong Predictor ◽  
Idiosyncratic Volatility ◽  
Cross Sectional ◽  
Volatility Risk ◽  
Model Free ◽  
Asymptotically Efficient Estimator ◽  
The Cross ◽  
Asymptotically Efficient

AbstractIn this paper, we formally show that the cross-sectional variance of stock returns is a consistent and asymptotically efficient estimator for aggregate idiosyncratic volatility. This measure has two key advantages: It is model free and observable at any frequency. Previous approaches have used monthly model-based measures constructed from time series of daily returns. The newly proposed cross-sectional volatility measure is a strong predictor for future returns on the aggregate stock market at the daily frequency. Using the cross section of size and book-to-market portfolios, we show that the portfolios’ exposures to the aggregate idiosyncratic volatility risk predict the cross section of expected returns.

The Short-Run and Long-Run Components of Idiosyncratic Volatility and Stock Returns

2021 ◽  
Author(s):  
Yunting Liu
Keyword(s):  
Risk Factors ◽  
Stock Returns ◽  
Systematic Risk ◽  
Risk Exposure ◽  
Idiosyncratic Volatility ◽  
Growth Options ◽  
Long Run ◽  
Expected Stock Returns ◽  
Short Run ◽  
Systematic Risk Factors

To capture the dynamics of idiosyncratic volatility of stock returns over different horizons and investigate the relationship between idiosyncratic volatility and expected stock returns, this paper develops and estimates a parsimonious model of idiosyncratic volatility consisting of a short-run and a long-run component. The conditional short-run and long-run components are found to be positively and negatively related to expected stock returns, respectively. The positive relation between the short-run component and stock returns may be caused by investors requiring compensation for bearing idiosyncratic volatility risk when facing trading frictions and hold underdiversified portfolios. The negative relationship between the long-run component and stock returns may reflect the fact that stocks with high long-run idiosyncratic volatility are less exposed to systematic risk factors and, hence, earn lower returns. Moreover, the low-risk exposure of stocks characterized by high idiosyncratic volatility lends support to real-option-based mechanisms to explain this negative relation. In particular, the systematic risk of a firm with abundant growth options crucially depends upon the risk exposure of these options. The value of growth options could rise significantly because of convexity when the increase in idiosyncratic volatility occurs over long horizons. And growth options’ systematic risk could fall because the relative magnitude of their value in relation to systematic risk factors decreases. This paper was accepted by David Simchi-Levi, finance.

On ethnicity of idiosyncratic risk and stock returns puzzle

Humanomics ◽  
2016 ◽  
Vol 32 (1) ◽  
pp. 48-68 ◽  
Author(s):  
Naseem Al Rahahleh ◽  
Iman Adeinat ◽  
Ishaq Bhatti
Keyword(s):  
Stock Returns ◽  
Financial Crises ◽  
Factor Model ◽  
Idiosyncratic Risk ◽  
Idiosyncratic Volatility ◽  
Content Type ◽  
Country Level ◽  
Expected Stock Returns ◽  
The Relationship ◽  
Three Factor

Purpose – The purpose of this paper is to understand the controversial issue of whether stock returns and idiosyncratic risks are related positively or negatively in case of Singaporean ethically poor screened stocks. Design/methodology/approach – To achieve the major objectives of this paper, it uses a multiple regression to explore the relationship between expected stock returns and idiosyncratic risk. The paper replicates the Lee and Faff’s (2009) three-factor capital asset-pricing model (CAPM) model in creating the six size/book-to-market portfolios from which it constructs the small minus big (SMB) and high minus low (HML) portfolios that capture the size and book-to-market equity factors, respectively. Findings – The basic finding of the paper is that there is a strong relation between idiosyncratic risk and the expected stock returns. In more details, we observe that the portfolio of stocks with the highest idiosyncratic volatility generates higher average returns (4.36 per cent) than the portfolio of stocks with the lowest idiosyncratic volatility (0.79 per cent) over the sample period. The paper observes that the stock’s idiosyncratic volatility is inversely correlated with the size of the underlying firm. Moreover, there is a pattern of relationships nearer the periods of financial crises: Asian and global financial crises. Research limitations/implications – This paper uses only a three-factor model on a single country. So it cannot be generalized to a multi-country level in the Association of Southeast Asian Nations (ASEAN) region, as the structure of each member country is different. Practical implications – This paper provides guidelines for policymakers and foreign investors in Singapore about the relationship. This research can also be extended to other ASEAN countries to understand this puzzle. Social implications – Ethically sensitive and faithful investors with small investment can benefit from the findings of this paper. Originality/value – The work reported in this paper is original, unpublished and is also not under consideration for publication elsewhere.

A Bound on Expected Stock Returns

2019 ◽  
Vol 33 (4) ◽  
pp. 1565-1617 ◽  
Author(s):  
Ohad Kadan ◽  
Xiaoxiao Tang
Keyword(s):  
Lower Bound ◽  
Stock Returns ◽  
Expected Returns ◽  
Sufficient Condition ◽  
Cross Sectional ◽  
Oxford University ◽  
Expected Stock Returns ◽  
Book To Market Ratio ◽  
Published Paper ◽  
Frequency Basis

Abstract We present a sufficient condition under which the prices of options written on a particular stock can be aggregated to calculate a lower bound on the expected returns of that stock. The sufficient condition imposes a restriction on a combination of the stock’s systematic and idiosyncratic risk. The lower bound is forward-looking and can be calculated on a high-frequency basis. We estimate the bound empirically and study its cross-sectional properties. We find that the bound increases with beta and book-to-market ratio and decreases with size and momentum. The bound provides an economically meaningful signal about future stock returns. (JEL G11, G12) Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.

Sign in / Sign up

Export Citation Format

Share Document