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Is information risk priced? Evidence from abnormal idiosyncratic volatility

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  • Yang, Yung Chiang
  • Zhang, Bohui
  • Zhang, Chu

Abstract

We propose a new, price-based measure of information risk called abnormal idiosyncratic volatility (AIV) that captures information asymmetry faced by uninformed investors. AIV is the idiosyncratic volatility prior to information events in excess of normal levels. Using earnings announcements as information events, we show that AIV is positively associated with informed return run-ups, abnormal insider trading, short selling, and institutional trading during pre-earnings-announcement periods. We find that stocks with high AIV earn economically and statistically larger future returns than stocks with low AIV. Taken together, our findings support the notion that information risk is priced.

Suggested Citation

  • Yang, Yung Chiang & Zhang, Bohui & Zhang, Chu, 2020. "Is information risk priced? Evidence from abnormal idiosyncratic volatility," Journal of Financial Economics, Elsevier, vol. 135(2), pages 528-554.
    • Handle: RePEc:eee:jfinec:v:135:y:2020:i:2:p:528-554
    DOI: 10.1016/j.jfineco.2019.06.013
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    More about this item

    Keywords

    Information risk; Idiosyncratic volatility; Earnings announcement; Expected returns;
    All these keywords.

    JEL classification:

    • G00 - Financial Economics - - General - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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