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The Information Content of Idiosyncratic Volatility

Listed author(s):
  • Jiang, George J.
  • Xu, Danielle
  • Yao, Tong
Registered author(s):

    Ang, Hodrick, Xing, and Zhang (2006a) show that stocks with high idiosyncratic return volatility tend to have low future returns. This paper further documents that idiosyncratic volatility is inversely related to future earning shocks, and more importantly, that the return-predictive power of idiosyncratic volatility is induced by its information content about future earnings. We examine various explanations of the triangular relation among idiosyncratic volatility, future earning shocks, and future stock returns. Our results show that the idiosyncratic volatility anomaly is not a simple manifestation of previously documented market anomalies related to excessive extrapolation on firm growth, over-investment tendency, accounting accruals, or investor underreaction to earnings news. On the other hand, there is evidence that the idiosyncratic volatility anomaly is related to corporate selective disclosure, and the anomaly is stronger among stocks with a less sophisticated investor base.

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    Article provided by Cambridge University Press in its journal Journal of Financial and Quantitative Analysis.

    Volume (Year): 44 (2009)
    Issue (Month): 01 (February)
    Pages: 1-28

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    Handle: RePEc:cup:jfinqa:v:44:y:2009:i:01:p:1-28_09
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    Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK

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