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Explaining the idiosyncratic volatility puzzle using Stochastic Discount Factors

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  • Chabi-Yo, Fousseni
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    Abstract

    I 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 Info

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

    Volume (Year): 35 (2011)
    Issue (Month): 8 (August)
    Pages: 1971-1983

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:8:p:1971-1983

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

    Related research

    Keywords: Stochastic discount factor Non-systematic coskewness Idiosyncratic volatility Cross-section of stock returns;

    References

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    Cited by:
    1. Chou, Pin-Huang & Ho, Po-Hsin & Ko, Kuan-Cheng, 2012. "Do industries matter in explaining stock returns and asset-pricing anomalies?," Journal of Banking & Finance, Elsevier, vol. 36(2), pages 355-370.
    2. Berrada, Tony & Hugonnier, Julien, 2013. "Incomplete information, idiosyncratic volatility and stock returns," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 448-462.

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