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Idiosyncratic volatility, stock market volatility, and expected stock returns

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  • Hui Guo
  • Robert Savickas
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Abstract

We find that the value-weighted idiosyncratic stock volatility and aggregate stock market volatility jointly exhibit strong predictive power for excess stock market returns. The stock market risk-return relation is found to be positive, as stipulated by the CAPM; however, idiosyncratic volatility is negatively related to future stock market returns. Also, idiosyncratic volatility appears to be a pervasive macrovariable, and its forecasting abilities are very similar to those of the consumption-wealth ratio proposed by Lettau and Ludvigson (2001).

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Bibliographic Info

Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2003-028.

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Date of creation: 2005
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Publication status: Published in Journal of Business and Economic Statistics, January 2006, 24(1), pp. 43-56
Handle: RePEc:fip:fedlwp:2003-028

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Keywords: Stock market ; Asset pricing;

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