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What Can We Learn from a Cross-Section of Returns? An Investigation of Idiosyncratic Volatility Range

Author

Listed:
  • Serguey Khovansky
  • Zhylyevskyy, Oleksandr

Abstract

We investigate empirical properties of idiosyncratic volatility using cross-sections of stock returns in the standard framework of geometric Brownian motion price dynamics. Knowledge of the sign and magnitude of idiosyncratic volatility characteristics may help us better understand the role of idiosyncratic risk in asset pricing. This knowledge may also help practitioners devise innovative investment strategies to exploit profitable investment opportunities that have not been eliminated because of transaction costs, investment indivisibilities, incomplete information, or the presence of other non-diversifiable factors and market rigidities.

Suggested Citation

  • Serguey Khovansky & Zhylyevskyy, Oleksandr, 2011. "What Can We Learn from a Cross-Section of Returns? An Investigation of Idiosyncratic Volatility Range," Staff General Research Papers Archive 32769, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:32769
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    File URL: http://www2.econ.iastate.edu/papers/p12769-2011-03-05.pdf
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    More about this item

    Keywords

    Common shock; Systematic risk; Cross-sectional returns; Idiosyncratic volatility; Generalized method of moments;
    All these keywords.

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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