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Idiosyncratic Volatility and the Cross Section of Expected Returns
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Idiosyncratic Volatility and the Cross Section of Expected Returns
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Idiosyncratic Volatility and the Cross Section of Expected Returns
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Journal Article
Idiosyncratic Volatility and the Cross Section of Expected Returns
2008
Overview
This paper examines the cross-sectional relation between idiosyncratic volatility and expected stock returns. The results indicate that i) the data frequency used to estimate idiosyncratic volatility, ii) the weighting scheme used to compute average portfolio returns, iii) the breakpoints utilized to sort stocks into quintile portfolios, and iv) using a screen for size, price, and liquidity play critical roles in determining the existence and significance of a relation between idiosyncratic risk and the cross section of expected returns. Portfoliolevel analyses based on two different measures of idiosyncratic volatility (estimated using daily and monthly data), three weighting schemes (value-weighted, equal-weighted, inverse volatility-weighted), three breakpoints (CRSP, NYSE, equal market share), and two different samples (NYSE/AMEX/NASDAQ and NYSE) indicate that no robustly significant relation exists between idiosyncratic volatility and expected returns.
Publisher
Cambridge University Press,University of Washington School of Business Administration, University of Utah David Eccles School of Business, and New York University Leonard N. Stern School of Business
Subject
/ Stocks
