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Financial distress and idiosyncratic volatility: An empirical investigation

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  • Chen, Jing
  • Chollete, Lorán
  • Ray, Rina

Abstract

We investigate the link between distress and idiosyncratic volatility. Specifically, we examine the twin puzzles of anomalously low returns for high idiosyncratic volatility stocks and high distress risk stocks, documented by Ang et al. (2006) and Campbell et al. (2008), respectively. We document that these puzzles are empirically connected, and can be explained by a simple, theoretical, single-beta CAPM model.

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  • Chen, Jing & Chollete, Lorán & Ray, Rina, 2010. "Financial distress and idiosyncratic volatility: An empirical investigation," Journal of Financial Markets, Elsevier, vol. 13(2), pages 249-267, May.
    • Handle: RePEc:eee:finmar:v:13:y:2010:i:2:p:249-267
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    Cited by:

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    2. Bo Li & Sabri Boubaker & Zhenya Liu & Waël Louhichi & Yao Yao, 2023. "Exploring the Nonlinear Idiosyncratic Volatility Puzzle: Evidence from China," Computational Economics, Springer;Society for Computational Economics, vol. 62(2), pages 527-559, August.
    3. Chui, David & Wing Cheng, Wui & Chi Chow, Sheung & LI, Ya, 2020. "Eastern Halloween effect: A stochastic dominance approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 68(C).
    4. Jun-Biao Lina & Ping-Yeh Su, 0. "Idiosyncratic Volatility and Liquidity Risk: How they have Explanatory Power in Stock Returns," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 0, pages 2.
    5. Tariq Aziz & Valeed Ahmad Ansari, 2017. "Idiosyncratic volatility and stock returns: Indian evidence," Cogent Economics & Finance, Taylor & Francis Journals, vol. 5(1), pages 1420998-142, January.
    6. Chen, Honghui & Zheng, Minrong, 2021. "IPO underperformance and the idiosyncratic risk puzzle," Journal of Banking & Finance, Elsevier, vol. 131(C).
    7. Rong Guan & Huiwen Wang & Haitao Zheng, 2020. "Improving accuracy of financial distress prediction by considering volatility: an interval-data-based discriminant model," Computational Statistics, Springer, vol. 35(2), pages 491-514, June.
    8. Chris Godfrey & Chris Brooks, 2015. "The Negative Credit Risk Premium Puzzle: A Limits to Arbitrage Story," ICMA Centre Discussion Papers in Finance icma-dp2015-07, Henley Business School, University of Reading.
    9. Jun-Biao Lina & Ping-Yeh Su, 2017. "Idiosyncratic Volatility and Liquidity Risk: How they have Explanatory Power in Stock Returns," Journal of Applied Finance & Banking, SCIENPRESS Ltd, vol. 7(1), pages 1-2.
    10. Kevin Aretz & Ming-Tsung Lin & Ser-Huang Poon, 2023. "Moneyness, Underlying Asset Volatility, and the Cross-Section of Option Returns," Review of Finance, European Finance Association, vol. 27(1), pages 289-323.
    11. Dongcheol Kim & Inro Lee, 2020. "The financial distress pricing puzzle in banking firms," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(2), pages 1351-1384, June.
    12. Kim, Dongcheol & Lee, Inro & Na, Haejung, 2019. "Financial distress, short sale constraints, and mispricing," Pacific-Basin Finance Journal, Elsevier, vol. 53(C), pages 94-111.
    13. Yi-Shu Wang & Ting-Chen & Zhen-Jia-Liu, 2020. "The Relationship between Accounting Information Quality and Idiosyncratic Volatility: An Empirical Study on Chinese A-Share Listed Companies," Eurasian Journal of Business and Management, Eurasian Publications, vol. 8(2), pages 150-166.

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