Explaining the idiosyncratic volatility puzzle using Stochastic Discount Factors
AbstractI use Stochastic Discount Factors to examine the sources of the idiosyncratic volatility premium. I find that non-zero risk aversion and firms' non-systematic coskewness determine the premium on idiosyncratic volatility risk. The firm's non-systematic coskewness measures the comovement of the asset's volatility with the market return. When I control for the non-systematic coskewness factor, I find no significant relation between idiosyncratic volatility and stock expected returns. My results are robust across different sample periods and firm characteristics.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 35 (2011)
Issue (Month): 8 (August)
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Web page: http://www.elsevier.com/locate/jbf
Stochastic discount factor Non-systematic coskewness Idiosyncratic volatility Cross-section of stock returns;
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