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Idiosyncratic volatility puzzle: influence of macro-finance factors

Author

Listed:
  • Nektarios Aslanidis

    (Universitat Rovira i Virgili)

  • Charlotte Christiansen

    (Aarhus University
    Lund University)

  • Neophytos Lambertides

    (Cyprus University of Technology)

  • Christos S. Savva

    (Cyprus University of Technology)

Abstract

We analyze the cross-sectional relation between expected idiosyncratic volatility and stock returns. The expected idiosyncratic volatility is conditioned on macro-finance factors as well as traditional asset pricing factors. The macro-finance factors are constructed from a large set of macroeconomic and financial variables. Our results show that the negative relation between expected idiosyncratic volatility and stock returns reverses to a positive one when accounting for the macro-finance effects. Portfolio analysis shows that the positive relation is economically important. The relation between expected idiosyncratic volatility and returns is not affected by business cycle variations. The empirical results are highly robust.

Suggested Citation

  • Nektarios Aslanidis & Charlotte Christiansen & Neophytos Lambertides & Christos S. Savva, 2019. "Idiosyncratic volatility puzzle: influence of macro-finance factors," Review of Quantitative Finance and Accounting, Springer, vol. 52(2), pages 381-401, February.
    • Handle: RePEc:kap:rqfnac:v:52:y:2019:i:2:d:10.1007_s11156-018-0713-x
    DOI: 10.1007/s11156-018-0713-x
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    2. Benoît Carmichael & Gilles Boevi Koumou & Kevin Moran, 2021. "The RQE-CAPM : New insights about the pricing of idiosyncratic risk," CIRANO Working Papers 2021s-28, CIRANO.

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    More about this item

    Keywords

    Idiosyncratic volatility puzzle; Macro-finance factors; Business cycle;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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