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Price informativeness: a potential explanation for the idiosyncratic volatility puzzle

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  • Jinyong Kim
  • Yongsik Kim

Abstract

Price informativeness is the amount of private information incorporated into stock prices and measured by $${R^2}$$R2 from regressions of stock returns on systematic risk factors. While $${R^2}$$R2 is closely related with idiosyncratic volatility, it is not interchangeable because magnitude of systematic volatility simultaneously changes. By controlling for the systematic volatility using the double-sorting portfolio approach, we suggest a potential involvement of price informativeness with the idiosyncratic volatility puzzle. Both cross-sectional evidence of monotonic and inverse relationship between idiosyncratic volatility and $${R^2}$$R2 and time-series evidence of disappearing alphas of the low-minus-high idiosyncratic volatility portfolios during recessions support an explanation of the idiosyncratic volatility puzzle in association with price informativeness.

Suggested Citation

  • Jinyong Kim & Yongsik Kim, 2023. "Price informativeness: a potential explanation for the idiosyncratic volatility puzzle," Applied Economics Letters, Taylor & Francis Journals, vol. 30(16), pages 2264-2269, September.
    • Handle: RePEc:taf:apeclt:v:30:y:2023:i:16:p:2264-2269
    DOI: 10.1080/13504851.2022.2096854
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