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Incomplete information, idiosyncratic volatility and stock returns

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  • Berrada, Tony
  • Hugonnier, Julien

Abstract

When investors have incomplete information, expected returns, as measured by an econometrician, deviate from those predicted by standard asset pricing models by including a term that is the product of the stock’s idiosyncratic volatility and the investors’ aggregated forecast errors. If investors are biased this term generates a relation between idiosyncratic volatility and expected stocks returns. Relying on forecast revisions from IBES, we construct a new variable that proxies for this term and show that it explains a significant part of the empirical relation between idiosyncratic volatility and stock returns.

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Bibliographic Info

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

Volume (Year): 37 (2013)
Issue (Month): 2 ()
Pages: 448-462

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:2:p:448-462

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

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Keywords: Idiosyncratic volatility; Incomplete information; Cross-section of stock returns;

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