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The return impact of realized and expected idiosyncratic volatility

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  • Peterson, David R.
  • Smedema, Adam R.
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    Abstract

    We show that the negative relation between realized idiosyncratic volatility, measured over the prior month, and returns is robust in non-January months. Controlling for realized idiosyncratic volatility, we show that the relation between returns and expected idiosyncratic volatility is positive and robust. Realized and expected idiosyncratic volatility are separate and important effects describing the cross-section of returns. We find the negative return on a zero-investment portfolio that is long high realized idiosyncratic volatility stocks and short low realized idiosyncratic volatility stocks is dependent on aggregate investor sentiment. In cross-sectional tests, we find the negative relation is weaker for stocks with a large analyst following and stronger for stocks with high dispersion of analyst forecasts. The positive relation between expected idiosyncratic volatility and returns is not due to mispricing.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 10 (October)
    Pages: 2547-2558

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:10:p:2547-2558

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    Web page: http://www.elsevier.com/locate/jbf

    Related research

    Keywords: Asset pricing Idiosyncratic volatility Seasonality Sentiment Limits to arbitrage;

    References

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    Cited by:
    1. Beltratti, Andrea & Paladino, Giovanna, 2011. "Is M&A different during a crisis? Evidence from the European banking sector," MPRA Paper 35065, University Library of Munich, Germany.
    2. Jubinski, Daniel & Tomljanovich, Marc, 2013. "Do FOMC minutes matter to markets? An intraday analysis of FOMC minutes releases on individual equity volatility and returns," Review of Financial Economics, Elsevier, vol. 22(3), pages 86-97.
    3. Berrada, Tony & Hugonnier, Julien, 2013. "Incomplete information, idiosyncratic volatility and stock returns," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 448-462.
    4. Beltratti, Andrea & Paladino, Giovanna, 2013. "Is M&A different during a crisis? Evidence from the European banking sector," Journal of Banking & Finance, Elsevier, vol. 37(12), pages 5394-5405.

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