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Explaining the idiosyncratic volatility puzzle using Stochastic Discount Factors

  • Chabi-Yo, Fousseni
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    I use Stochastic Discount Factors to examine the sources of the idiosyncratic volatility premium. I find that non-zero risk aversion and firms' non-systematic coskewness determine the premium on idiosyncratic volatility risk. The firm's non-systematic coskewness measures the comovement of the asset's volatility with the market return. When I control for the non-systematic coskewness factor, I find no significant relation between idiosyncratic volatility and stock expected returns. My results are robust across different sample periods and firm characteristics.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0378426611000239
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    Article provided by Elsevier in its journal Journal of Banking & Finance.

    Volume (Year): 35 (2011)
    Issue (Month): 8 (August)
    Pages: 1971-1983

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    Handle: RePEc:eee:jbfina:v:35:y:2011:i:8:p:1971-1983
    Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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