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Impact of idiosyncratic volatility on stock returns: A cross-sectional study

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  • Serguey Khovansky
  • Zhylyevskyy, Oleksandr

Abstract

This paper proposes a new approach to estimate the idiosyncratic volatility premium. In contrast to the popular two-pass regression method, this approach relies on a novel GMM-type estimation procedure that uses only a single cross-section of return observations to obtain consistent estimates. Also, it enables a comparison of idiosyncratic volatility premia estimated using stock returns with different holding periods. The approach is empirically illustrated by applying it to daily, weekly, monthly, quarterly, and annual US stock return data over the course of 2000–2011. The results suggest that the idiosyncratic volatility premium tends to be positive on daily return data, but negative on monthly, quarterly, and annual data. They also indicate the presence of a January effect.

Suggested Citation

  • Serguey Khovansky & Zhylyevskyy, Oleksandr, 2013. "Impact of idiosyncratic volatility on stock returns: A cross-sectional study," Staff General Research Papers Archive 35915, Iowa State University, Department of Economics.
  • Handle: RePEc:isu:genres:35915
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    1. repec:taf:oaefxx:v:5:y:2017:i:1:p:1420998 is not listed on IDEAS
    2. Hasan, Mostafa Monzur & Habib, Ahsan, 2017. "Firm life cycle and idiosyncratic volatility," International Review of Financial Analysis, Elsevier, vol. 50(C), pages 164-175.
    3. repec:taf:apeclt:v:24:y:2017:i:14:p:1005-1018 is not listed on IDEAS
    4. repec:eee:phsmap:v:497:y:2018:i:c:p:218-235 is not listed on IDEAS
    5. repec:eee:stapro:v:129:y:2017:i:c:p:196-202 is not listed on IDEAS
    6. Li, Xiao-Ming & Peng, Lu, 2017. "US economic policy uncertainty and co-movements between Chinese and US stock markets," Economic Modelling, Elsevier, vol. 61(C), pages 27-39.
    7. Cao, Jie & Han, Bing, 2016. "Idiosyncratic risk, costly arbitrage, and the cross-section of stock returns," Journal of Banking & Finance, Elsevier, vol. 73(C), pages 1-15.

    More about this item

    Keywords

    Idiosyncratic volatility; Idiosyncratic volatility premium; Cross-section of stock returns; Generalized method of moments;

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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