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The role of analysts: An examination of the idiosyncratic volatility anomaly in the Chinese stock market

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  • Gu, Ming
  • Jiang, George J.
  • Xu, Bu

Abstract

Given the unique institutional setting in the Chinese stock market, we investigate the effect of analyst activity on the idiosyncratic volatility (IVOL) anomaly. Our results show that the inverse relation between IVOL and future stock returns is more pronounced in stocks without analyst coverage. Furthermore, for stocks with analyst coverage, revision activity attenuates the IVOL anomaly. In fact, we find a positive relation between IVOL and future stock returns among stocks receiving analyst upgrades. We interpret our findings as evidence that analysts play an important role in disseminating information and reducing information asymmetry. As a result, news about firm fundamentals, particularly positive news, is incorporated more quickly into stock prices when analysts issue upgrade revisions. Finally, we show that our results are not subsumed by other potential explanations of the IVOL anomaly.

Suggested Citation

  • Gu, Ming & Jiang, George J. & Xu, Bu, 2019. "The role of analysts: An examination of the idiosyncratic volatility anomaly in the Chinese stock market," Journal of Empirical Finance, Elsevier, vol. 52(C), pages 237-254.
    • Handle: RePEc:eee:empfin:v:52:y:2019:i:c:p:237-254
    DOI: 10.1016/j.jempfin.2019.03.007
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    Citations

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    Cited by:

    1. Liu, Jie & Wu, Chonglin & Yuan, Lin & Liu, Jia, 2022. "Opening price manipulation and its value influences," International Review of Financial Analysis, Elsevier, vol. 83(C).
    2. Hao, Jing & Xiong, Xiong, 2021. "Retail investor attention and firms' idiosyncratic risk: Evidence from China," International Review of Financial Analysis, Elsevier, vol. 74(C).
    3. Liu, Hao & Chen, Yue & Wan, Wei & Zhang, Qun, 2021. "A novel explanation for idiosyncratic volatility anomaly: An asset decomposition perspective," Economics Letters, Elsevier, vol. 206(C).
    4. Zhaobo Zhu & Wenjie Ding & Yi Jin & Dehua Shen, 2023. "Dissecting the Idiosyncratic Volatility Puzzle: A Fundamental Analysis Approach," Post-Print hal-04194180, HAL.
    5. Hsin, Chin-Wen & Peng, Shu-Cing, 2023. "Investor propensity to speculate and price delay in emerging markets," International Review of Financial Analysis, Elsevier, vol. 86(C).
    6. Chen, Haozhi & Zhang, Yue, 2023. "Research on the effect of firm-specific investor sentiment on the idiosyncratic volatility anomaly: Evidence from the Chinese market," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).
    7. Ting Zhang & George J. Jiang & Wei‐Xing Zhou, 2021. "Order imbalance and stock returns: New evidence from the Chinese stock market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 2809-2836, June.
    8. Ma, Yao & Yang, Baochen & Li, Jinyong & Shen, Yue, 2023. "Trend information and cross-sectional returns: The role of analysts," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    9. Lin, Mei-Chen, 2023. "Analyst coverage and the idiosyncratic skewness effect in the Taiwan stock market," International Review of Financial Analysis, Elsevier, vol. 85(C).
    10. Gong, Qiang & Jacoby, Gady & Li, Shi & Lu, Lei, 2021. "Commonality in disagreement," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    11. Liu, Chang & Sun, Peng & Zhu, Dongming, 2023. "Lottery preference, short-sale constraint, and the salience effect: Evidence from China," Economic Modelling, Elsevier, vol. 125(C).

    More about this item

    Keywords

    Analyst coverage; Analyst revision; Idiosyncratic volatility anomaly; Chinese stock market;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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