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Incomplete Information Idiosyncratic Volatility And Stock Returns
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Book Synopsis Incomplete Information, Idiosyncratic Volatility and Stock Returns by : Julien Hugonnier
Download or read book Incomplete Information, Idiosyncratic Volatility and Stock Returns written by Julien Hugonnier and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: We develop a model of firm investment under incomplete information that explains why idiosyncratic volatility and stock returns are related. When the unobserved state variable proxies for the business cycles, we show that a properly calibrated version of the model generates a negative relation due to the natural asymmetry in the length of expansions and recessions. We further show that, conditional on earning surprises, the relation between idiosyncratic volatility and stock returns is positive after good news and negative after bad news. This result provides new insights on the nature of stock return predictability.
Book Synopsis Idiosyncratic Risk, Investor Base and Returns by : Doina Chichernea
Download or read book Idiosyncratic Risk, Investor Base and Returns written by Doina Chichernea and published by . This book was released on 2018 with total page 42 pages. Available in PDF, EPUB and Kindle. Book excerpt: We provide empirical evidence for the incomplete information model advanced by Merton (1987), which shows that the relation between idiosyncratic volatility (IV) and expected return is conditional on the firm's investor base. Using four different proxies for investor base, we show that idiosyncratic risk premiums are larger for neglected stocks, and smaller or even economically insignificant for visible stocks. Since neglected stocks have greater IV, the total IV risk premium (price times quantity) for neglected stocks will be greater than for visible stocks. Additionally, we find a positive size effect and negative beta effect after controlling for IV, which are both consistent with Merton's model predictions. Overall, our results provide strong support for the theory that the market segmentation induced by incomplete information is an important component of the documented influence of IV in the cross-section of returns.
Book Synopsis The Information Content in Implied Idiosyncratic Volatility and the Cross-Section of Stock Returns by : Dean Diavatopoulos
Download or read book The Information Content in Implied Idiosyncratic Volatility and the Cross-Section of Stock Returns written by Dean Diavatopoulos and published by . This book was released on 2014 with total page 33 pages. Available in PDF, EPUB and Kindle. Book excerpt: Current literature is inconclusive as to whether idiosyncratic risk influences future stock returns and the direction of the impact. Prior studies are based on historical realized volatility. Implied volatilities from option prices represent the market's assessment of future risk and are likely a superior measure to historical realized volatility. We use implied idiosyncratic volatilities on firms with traded options to examine the relation between idiosyncratic volatility and future returns. We find a strong positive link between implied idiosyncratic risk and future returns. After considering the impact of implied idiosyncratic volatility, historical realized idiosyncratic volatility is unimportant. This performance is strongly tied to small size and high book-to-market equity firms.
Book Synopsis Empirical Asset Pricing by : Turan G. Bali
Download or read book Empirical Asset Pricing written by Turan G. Bali and published by John Wiley & Sons. This book was released on 2016-02-26 with total page 512 pages. Available in PDF, EPUB and Kindle. Book excerpt: “Bali, Engle, and Murray have produced a highly accessible introduction to the techniques and evidence of modern empirical asset pricing. This book should be read and absorbed by every serious student of the field, academic and professional.” Eugene Fama, Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago and 2013 Nobel Laureate in Economic Sciences “The empirical analysis of the cross-section of stock returns is a monumental achievement of half a century of finance research. Both the established facts and the methods used to discover them have subtle complexities that can mislead casual observers and novice researchers. Bali, Engle, and Murray’s clear and careful guide to these issues provides a firm foundation for future discoveries.” John Campbell, Morton L. and Carole S. Olshan Professor of Economics, Harvard University “Bali, Engle, and Murray provide clear and accessible descriptions of many of the most important empirical techniques and results in asset pricing.” Kenneth R. French, Roth Family Distinguished Professor of Finance, Tuck School of Business, Dartmouth College “This exciting new book presents a thorough review of what we know about the cross-section of stock returns. Given its comprehensive nature, systematic approach, and easy-to-understand language, the book is a valuable resource for any introductory PhD class in empirical asset pricing.” Lubos Pastor, Charles P. McQuaid Professor of Finance, University of Chicago Empirical Asset Pricing: The Cross Section of Stock Returns is a comprehensive overview of the most important findings of empirical asset pricing research. The book begins with thorough expositions of the most prevalent econometric techniques with in-depth discussions of the implementation and interpretation of results illustrated through detailed examples. The second half of the book applies these techniques to demonstrate the most salient patterns observed in stock returns. The phenomena documented form the basis for a range of investment strategies as well as the foundations of contemporary empirical asset pricing research. Empirical Asset Pricing: The Cross Section of Stock Returns also includes: Discussions on the driving forces behind the patterns observed in the stock market An extensive set of results that serve as a reference for practitioners and academics alike Numerous references to both contemporary and foundational research articles Empirical Asset Pricing: The Cross Section of Stock Returns is an ideal textbook for graduate-level courses in asset pricing and portfolio management. The book is also an indispensable reference for researchers and practitioners in finance and economics. Turan G. Bali, PhD, is the Robert Parker Chair Professor of Finance in the McDonough School of Business at Georgetown University. The recipient of the 2014 Jack Treynor prize, he is the coauthor of Mathematical Methods for Finance: Tools for Asset and Risk Management, also published by Wiley. Robert F. Engle, PhD, is the Michael Armellino Professor of Finance in the Stern School of Business at New York University. He is the 2003 Nobel Laureate in Economic Sciences, Director of the New York University Stern Volatility Institute, and co-founding President of the Society for Financial Econometrics. Scott Murray, PhD, is an Assistant Professor in the Department of Finance in the J. Mack Robinson College of Business at Georgia State University. He is the recipient of the 2014 Jack Treynor prize.
Book Synopsis Revisiting Idiosyncratic Volatility and Stock Returns by : Fatma Saryal Sonmez
Download or read book Revisiting Idiosyncratic Volatility and Stock Returns written by Fatma Saryal Sonmez and published by . This book was released on 2013 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper's aim is to revisit the relation between idiosyncratic volatility and future stock returns. There are three key findings: First, we confirm earlier studies which show a negative relation. Further we show that it is the month to month changes in idiosyncratic volatility that produce this observed relation. More specifically, a portfolio of stocks that move from a lower (higher) idiosyncratic volatility quintile to higher (lower) one earns positive (negative) abnormal returns. Eliminating all firm-month observations with idiosyncratic volatility quintile changes, we find a positive relation. Second, we link our findings with corporate related events. Third, we find that after 2000, the idiosyncratic volatility effect disappears.
Book Synopsis The Information Content of Idiosyncratic Volatility by : George J. Jiang
Download or read book The Information Content of Idiosyncratic Volatility written by George J. Jiang and published by . This book was released on 2012 with total page 28 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uses adverse selection in corporate information disclosure to explain a recently documented asset pricing anomaly. Ang, Hodrick, Xing, and Zhang (2006a) show that stocks with high idiosyncratic return volatilities tend to have low future returns. In this paper, we find that idiosyncratic volatility is also inversely related to future earning shocks. More importantly, we show that the return predictive power of idiosyncratic volatility is induced by its information content on future earnings. We provide empirical results to support our explanation that firms with poor prospect of future earnings tend to disclose less information, resulting in a higher degree of heterogeneity in investors beliefs, which in turn leads to higher stock return volatility and trading volume. Further analysis suggests that investors tend to underreact to earnings information in idiosyncratic volatility, and the mispricing of idiosyncratic volatility is inversely related to both investor sophistication and stock liquidity.
Book Synopsis Implied Idiosyncratic Volatility and Stock Return Predictability by : Cesario Mateus
Download or read book Implied Idiosyncratic Volatility and Stock Return Predictability written by Cesario Mateus and published by . This book was released on 2016 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper investigates the role of volatility risk on stock return predictability. Using 596 stock options traded at the American Stock Exchange and the Chicago Board Options Exchange (CBOE) for the period from January 2001 to December 2010, it examines the relation between different idiosyncratic volatility measures and expected stock returns for a period that involves both the dotcom bubble and the recent financial crisis. First it is showed that implied idiosyncratic volatility is the best stock return predictor among the different volatility measures used. Second, cross-section firm-specific characteristics are important on stock returns forecast. Third, we provide evidence that higher short selling constraints impact negatively stock returns having liquidity the opposite effect.
Book Synopsis Avoiding Idiosyncratic Volatility by : Marco Di Maggio
Download or read book Avoiding Idiosyncratic Volatility written by Marco Di Maggio and published by . This book was released on 2023 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: Despite positive and significant earnings announcement premia, we find that institutional investors reduce their exposure to stocks before earnings announcements. A novel result on the sensitivity of flows to individual stock returns provides a potential explanation. We show that extreme announcement returns for an individual holding lead to substantial outflows, controlling for overall performance, and they increase the probability of managers leaving the fund. Reducing the exposure to these stocks before the announcement mitigates the outflows. We build a model to describe and quantify this tradeoff. Overall, the paper identifies a new dimension of limits to arbitrage for institutions.
Book Synopsis Idiosyncratic Volatility, Its Expected Variation, and the Cross-Section of Stock Returns by : Nicole Branger
Download or read book Idiosyncratic Volatility, Its Expected Variation, and the Cross-Section of Stock Returns written by Nicole Branger and published by . This book was released on 2019 with total page 61 pages. Available in PDF, EPUB and Kindle. Book excerpt: We show that the widely documented negative relation between idiosyncratic volatility (IVOL) and expected returns can be explained by the mean reversion of stocks' idiosyncratic volatilities. We use option-implied information to extract the mean reversion speed of IVOL in an almost model-free fashion. This allows us to identify stocks for which past IVOL is a bad proxy for expected IVOL. These stocks solely drive the negative relation, and a long--short portfolio earns a monthly risk-adjusted return of 2.74%, on average. In a horse race, the mean reversion speed is superior to prominent competing explanations of the IVOL puzzle.
Book Synopsis Idiosyncratic Volatility and Stock Returns by : Kuntara Pukthuanthong
Download or read book Idiosyncratic Volatility and Stock Returns written by Kuntara Pukthuanthong and published by . This book was released on 2014 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Empirical evidences regarding the association of idiosyncratic volatility and stock returns are inconsistent with the capital asset pricing model (CAPM) which implies that idiosyncratic risk should not be priced because it would be fully eliminated through diversification. Using estimated-EGARCH conditional idiosyncratic volatility of individual stocks across 36 countries from 1973 to 2007, we find that idiosyncratic risk is priced on a significantly positive risk premium for stock returns. The evidence is statistically and economically significant. It overwhelmingly supports the prediction of existing theories that idiosyncratic risk is positively related to expected returns.
Download or read book 平凡社ギャラリー written by and published by . This book was released on 1974 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Idiosyncratic Volatility, Stock Returns, and Priming Processes by : Nir Chen
Download or read book Idiosyncratic Volatility, Stock Returns, and Priming Processes written by Nir Chen and published by . This book was released on 2017 with total page 30 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis High Idiosyncratic Volatility and Low Returns by : Andrew Ang
Download or read book High Idiosyncratic Volatility and Low Returns written by Andrew Ang and published by . This book was released on 2008 with total page 50 pages. Available in PDF, EPUB and Kindle. Book excerpt: Stocks with recent past high idiosyncratic volatility have low future average returns around the world. Across 23 developed markets, the difference in average returns between the extreme quintile portfolios sorted on idiosyncratic volatility is -1.31% per month, after controlling for world market, size, and value factors. The effect is individually significant in each G7 country. In the U.S., we rule out explanations based on trading frictions, information dissemination, and higher moments. There is strong comovement in the low returns to high idiosyncratic volatility stocks across countries, suggesting that broad, not easily diversifiable, factors may lie behind this phenomenon.
Book Synopsis Three Essays on Stock Market Volatility by : Chengbo Fu
Download or read book Three Essays on Stock Market Volatility written by Chengbo Fu and published by . This book was released on 2019 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation consists of three essays on stock market volatility. In the first essay, we show that investors will have the information in the idiosyncratic volatility spread when using two different models to estimate idiosyncratic volatility. In a theoretical framework, we show that idiosyncratic volatility spread is related to the change in beta and the new betas from the extra factors between two different factor models. Empirically, we find that idiosyncratic volatility spread predicts the cross section of stock returns. The negative spread-return relation is independent from the relation between idiosyncratic volatility and stock returns. The result is driven by the change in beta component and the new beta component of the spread. The spread-relation is also robust when investors estimate the spread using a conditional model or EGARCH method. In the second essay, the variance of stock returns is decomposed based on a conditional Fama-French three-factor model instead of its unconditional counterpart. Using time-varying alpha and betas in this model, it is evident that four additional risk terms must be considered. They include the variance of alpha, the variance of the interaction between the time-varying component of beta and factors, and two covariance terms. These additional risk terms are components that are included in the idiosyncratic risk estimate using an unconditional model. By investigating the relation between the risk terms and stock returns, we find that only the variance of the time-varying alpha is negatively associated with stock returns. Further tests show that stock returns are not affected by the variance of time-varying beta. These results are consistent with the findings in the literature identifying return predictability from time-varying alpha rather than betas. In the third essay, we employ a two-step estimation method to separate the upside and downside idiosyncratic volatility and examine its relation with future stock returns. We find that idiosyncratic volatility is negatively related to stock returns when the market is up and when it is down. The upside idiosyncratic volatility is not related to stock returns. Our results also suggest that the relation between downside idiosyncratic volatility and future stock returns is negative and significant. It is the downside idiosyncratic volatility that drives the inverse relation between total idiosyncratic volatility and stock returns. The results are consistent with the literature that investor overreact to bad news and underreact to good news.
Book Synopsis The Role of Non-Accounting Information in Understanding Stock Return Volatility by : Yaowen Shan
Download or read book The Role of Non-Accounting Information in Understanding Stock Return Volatility written by Yaowen Shan and published by . This book was released on 2018 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: Uncertainty about firms' future payoffs is the dominant factor in explaining stock return volatility at the firm level. However, summary financial statement numbers such as earnings only provide a limited measure of expected payoffs, as they do not reflect firms' fundamentals on a timely basis. We demonstrate theoretically and empirically that information about firms' fundamentals contained in analysts' forecasts (which we label as quot;non-accounting informationquot;) is expected to influence future stock return volatility. When combined with Ohlson's (1995) linear information dynamics, the accounting version of the Campbell-Shiller model (Campbell and Shiller 1988a, 1988b; Vuolteenaho 2002) implies that if current non-accounting information is more uncertain, then future stock returns are expected to be more volatile. Our empirical evidence supports the theoretical predictions, and the results are valid for measures of both systematic and idiosyncratic volatility. Additional analysis yields some evidence that both favourable and unfavourable news from non-accounting information increases future stock return volatility. Overall, our results highlight the relevance of information in analysts' forecasts beyond what is contained in the current financial statements.
Book Synopsis Price-Based Investment Strategies by : Adam Zaremba
Download or read book Price-Based Investment Strategies written by Adam Zaremba and published by Springer. This book was released on 2018-07-25 with total page 325 pages. Available in PDF, EPUB and Kindle. Book excerpt: This compelling book examines the price-based revolution in investing, showing how research over recent decades has reinvented technical analysis. The authors discuss the major groups of price-based strategies, considering their theoretical motivation, individual and combined implementation, and back-tested results when applied to investment across country stock markets. Containing a comprehensive sample of performance data, taken from 24 major developed markets around the world and ranging over the last 25 years, the authors construct practical portfolios and display their performance—ensuring the book is not only academically rigorous, but practically applicable too. This is a highly useful volume that will be of relevance to researchers and students working in the field of price-based investing, as well as individual investors, fund pickers, market analysts, fund managers, pension fund consultants, hedge fund portfolio managers, endowment chief investment officers, futures traders, and family office investors.
Book Synopsis Idiosyncratic Volatility, Conditional Liquidity and Stock Returns by : Juliana Malagon
Download or read book Idiosyncratic Volatility, Conditional Liquidity and Stock Returns written by Juliana Malagon and published by . This book was released on 2016 with total page 32 pages. Available in PDF, EPUB and Kindle. Book excerpt: There is strong evidence showing that stocks with higher levels of idiosyncratic risk provide relatively lower returns than stocks with lower levels of it. This paper points out that this negative idiosyncratic risk - expected returns relation is not pervasive over time, and provides a plausible explanation for its time-varying nature. Our results suggest that following recessions, the conditional pricing of liquidity creates a correction in prices of the high idiosyncratic volatility stocks that persists up to 10 months. As a result, the negative relation between idiosyncratic risk and expected returns is not observed following recessions.
