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Expected Volatility, Unexpected Volatility, And The Cross‐Section Of Stock Returns

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  • Choong Tze Chua
  • Jeremy Goh
  • Zhe Zhang

Abstract

The existing literature finds conflicting results on the cross‐sectional relation between expected returns and idiosyncratic volatility. We contend that at the firm level, the sample correlation between unexpected returns and expected idiosyncratic volatility can cloud the true relation between the expected return and expected idiosyncratic volatility. We show strong evidence that unexpected idiosyncratic volatility is positively related to unexpected returns. Using unexpected idiosyncratic volatility to control for unexpected returns, we find expected idiosyncratic volatility to be significantly and positively related to expected returns. This result holds after controlling for various firm characteristics, and it is robust across different sample periods.

Suggested Citation

  • Choong Tze Chua & Jeremy Goh & Zhe Zhang, 2010. "Expected Volatility, Unexpected Volatility, And The Cross‐Section Of Stock Returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 33(2), pages 103-123, June.
    • Handle: RePEc:bla:jfnres:v:33:y:2010:i:2:p:103-123
    DOI: 10.1111/j.1475-6803.2010.01264.x
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