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Idiosyncratic Volatility, Stock Market Volatility, and Expected Stock Returns

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  • Guo, Hui
  • Savickas, Robert
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Abstract

We find that the value-weighted idiosyncratic stock volatility and aggregate stock market volatility jointly exhibit strong predictive power for excess stock market returns. The stock market risk-return relation is found to be positive, as stipulated by the CAPM; however, idiosyncratic volatility is negatively related to future stock market returns. Also, idiosyncratic volatility appears to be a pervasive macrovariable, and its forecasting abilities are very similar to those of the consumption-wealth ratio proposed by Lettau and Ludvigson (2001).

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Bibliographic Info

Article provided by American Statistical Association in its journal Journal of Business and Economic Statistics.

Volume (Year): 24 (2006)
Issue (Month): (January)
Pages: 43-56

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Handle: RePEc:bes:jnlbes:v:24:y:2006:p:43-56

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