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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Elsevier in its journal Journal of Banking & Finance.
Volume (Year): 35 (2011)
Issue (Month): 8 (August)
Contact details of provider:
Web page: http://www.elsevier.com/locate/jbf
Stochastic discount factor Non-systematic coskewness Idiosyncratic volatility Cross-section of stock returns;
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2006.
"The Cross-Section of Volatility and Expected Returns,"
Journal of Finance,
American Finance Association, vol. 61(1), pages 259-299, 02.
- Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2004. "The Cross-Section of Volatility and Expected Returns," NBER Working Papers 10852, National Bureau of Economic Research, Inc.
- Jiang, George J. & Tian, Yisong S., 2010. "Misreaction or misspecification? A re-examination of volatility anomalies," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2358-2369, October.
- Ang, Andrew & Hodrick, Robert J. & Xing, Yuhang & Zhang, Xiaoyan, 2009.
"High idiosyncratic volatility and low returns: International and further U.S. evidence,"
Journal of Financial Economics,
Elsevier, vol. 91(1), pages 1-23, January.
- Andrew Ang & Robert J. Hodrick & Yuhang Xing & Xiaoyan Zhang, 2008. "High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence," NBER Working Papers 13739, National Bureau of Economic Research, Inc.
- Newey, Whitney & West, Kenneth, 2014.
"A simple, positive semi-definite, heteroscedasticity and autocorrelation consistent covariance matrix,"
Publishing House "SINERGIA PRESS", vol. 33(1), pages 125-132.
- Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
- Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
- Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
- Tim Bollerslev & Hao Zhou, 2007.
"Expected Stock Returns and Variance Risk Premia,"
CREATES Research Papers
2007-17, School of Economics and Management, University of Aarhus.
- Tim Bollerslev & Tzuo Hao & George Tauchen, 2008. "Expected Stock Returns and Variance Risk Premia," CREATES Research Papers 2008-48, School of Economics and Management, University of Aarhus.
- Tim Bollerslev & Hao Zhou, 2006. "Expected stock returns and variance risk premia," Finance and Economics Discussion Series 2007-11, Board of Governors of the Federal Reserve System (U.S.).
- Jegadeesh, Narasimhan & Titman, Sheridan, 1993. " Returns to Buying Winners and Selling Losers: Implications for Stock Market Efficiency," Journal of Finance, American Finance Association, vol. 48(1), pages 65-91, March.
- Merton, Robert C, 1987.
" A Simple Model of Capital Market Equilibrium with Incomplete Information,"
Journal of Finance,
American Finance Association, vol. 42(3), pages 483-510, July.
- Merton, Robert C., 1987. "A simple model of capital market equilibrium with incomplete information," Working papers 1869-87., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Todd Mitton & Keith Vorkink, 2007. "Equilibrium Underdiversification and the Preference for Skewness," Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1255-1288.
- Bali, Turan G. & Cakici, Nusret & Whitelaw, Robert F., 2011. "Maxing out: Stocks as lotteries and the cross-section of expected returns," Journal of Financial Economics, Elsevier, vol. 99(2), pages 427-446, February.
- Fu, Fangjian, 2009. "Idiosyncratic risk and the cross-section of expected stock returns," Journal of Financial Economics, Elsevier, vol. 91(1), pages 24-37, January.
- Matthew Spiegel & Xiaotong Wang, 2005. "Cross-sectional Variation in Stock Returns: Liquidity and Idiosyncratic Risk," Yale School of Management Working Papers amz2540, Yale School of Management, revised 01 Mar 2006.
- Campbell R. Harvey & Akhtar Siddique, 2000. "Conditional Skewness in Asset Pricing Tests," Journal of Finance, American Finance Association, vol. 55(3), pages 1263-1295, 06.
- Gurdip Bakshi & Nikunj Kapadia & Dilip Madan, 2003. "Stock Return Characteristics, Skew Laws, and the Differential Pricing of Individual Equity Options," Review of Financial Studies, Society for Financial Studies, vol. 16(1), pages 101-143.
- Taylor, Stephen J. & Yadav, Pradeep K. & Zhang, Yuanyuan, 2010. "The information content of implied volatilities and model-free volatility expectations: Evidence from options written on individual stocks," Journal of Banking & Finance, Elsevier, vol. 34(4), pages 871-881, April.
- Turan G. Bali & Armen Hovakimian, 2009. "Volatility Spreads and Expected Stock Returns," Management Science, INFORMS, vol. 55(11), pages 1797-1812, November.
- Nicholas Barberis & Ming Huang, 2008. "Stocks as Lotteries: The Implications of Probability Weighting for Security Prices," American Economic Review, American Economic Association, vol. 98(5), pages 2066-2100, December.
- Brian Boyer & Todd Mitton & Keith Vorkink, 2010. "Expected Idiosyncratic Skewness," Review of Financial Studies, Society for Financial Studies, vol. 23(1), pages 169-202, January.
- 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.
- Berrada, Tony & Hugonnier, Julien, 2013.
"Incomplete information, idiosyncratic volatility and stock returns,"
Journal of Banking & Finance,
Elsevier, vol. 37(2), pages 448-462.
- Tony BERRADA & Julien HUGONNIER, 2008. "Incomplete information, idiosyncratic volatility and stock returns," Swiss Finance Institute Research Paper Series 08-23, Swiss Finance Institute.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Zhang, Lei).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.