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Estimating Idiosyncratic Volatility and Its Effects on a Cross-Section of Returns

  • Serguey Khovansky
  • Zhylyevskyy, Oleksandr

We apply a new econometric method -- the generalized method of moments under a common shock -- to estimate idiosyncratic volatility premium and average idiosyncratic stock volatility. In contrast to the popular two-pass estimation approach of Fama and MacBeth (1973), the method requires using only a cross-section of return observations. We apply it to cross-sections of weekly U.S. stock returns in January and October 2008 and fiÂ…nd that during these months, the idiosyncratic volatility premium is nearly always negative and statistically signiÂ…cant. The results also indicate that the average idiosyncratic stock volatility increased by at least 50% between January and October.

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File URL: http://www.econ.iastate.edu/sites/default/files/publications/papers/p14990-2012-01-31.pdf
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Paper provided by Iowa State University, Department of Economics in its series Staff General Research Papers with number 34990.

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Date of creation: 31 Jan 2012
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Handle: RePEc:isu:genres:34990
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Iowa State University, Dept. of Economics, 260 Heady Hall, Ames, IA 50011-1070

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