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Idiosyncratic Volatility and the Cross Section of Expected Returns

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Author Info
Bali, Turan G.
Cakici, Nusret
Abstract

This 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.

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Publisher Info
Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

Volume (Year): 43 (2008)
Issue (Month): 01 (March)
Pages: 29-58
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Handle: RePEc:cup:jfinqa:v:43:y:2008:i:01:p:29-58_00

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  1. Turan G. Bali & Nusret Cakici & Robert F. Whitelaw, 2009. "Maxing Out: Stocks as Lotteries and the Cross-Section of Expected Returns," NBER Working Papers 14804, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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This page was last updated on 2009-12-14.

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