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Idiosyncratic Volatility Conditional Liquidity And Stock Returns
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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.
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.
Book Synopsis Cross-Sectional Variation in Stock Returns by : Matthew I. Spiegel
Download or read book Cross-Sectional Variation in Stock Returns written by Matthew I. Spiegel and published by . This book was released on 2006 with total page 51 pages. Available in PDF, EPUB and Kindle. Book excerpt: The roles played by idiosyncratic risk and liquidity in determining stock returns have recently received a great deal of attention. However, recent empirical tests have not examined the interaction between these two factors. As others have shown (and this paper confirms) stocks idiosyncratic risk and liquidity are negatively correlated. To what extent then is each variable responsible for the observed cross sectional patterns in stock returns? Overall, using monthly data, the paper finds that stock returns are increasing with the level of idiosyncratic risk and decreasing in a stock's liquidity. However, while both liquidity and idiosyncratic risk play a role in determining returns, the impact of idiosyncratic risk is much stronger and often eliminates liquidity's explanatory power. The point estimates indicate that a one standard deviation change in idiosyncratic risk has between 2.5 and 8 times the impact of a corresponding change in liquidity on cross sectional expected returns.
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 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 Idiosyncratic Volatility and the Cross-Section of Expected Returns by : Turan G. Bali
Download or read book Idiosyncratic Volatility and the Cross-Section of Expected Returns written by Turan G. Bali and published by . This book was released on 2012 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the cross-sectional relation between idiosyncratic volatility and expected stock returns. The results indicate that (i) data frequency used to estimate idiosyncratic volatility, (ii) weighting scheme used to compute average portfolio returns, (iii) breakpoints utilized to sort stocks into quintile portfolios, and (iv) using a screen for size, price and liquidity play a critical role in determining the existence and significance of a relation between idiosyncratic risk and the cross-section of expected returns. Portfolio-level 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 there is no robust, significant relation between idiosyncratic volatility and expected returns.
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 Idiosyncratic Volatility, Measurement Frequency and Return Reversal by : Xiafei Li
Download or read book Idiosyncratic Volatility, Measurement Frequency and Return Reversal written by Xiafei Li and published by . This book was released on 2014 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines whether the negative relation between idiosyncratic volatility and expected returns is due to stock return reversals as argued by Fu (2009) and Huang, Liu, Rhee and Zhang (2010). Controlling the return reversal effect, it shows that stocks with different past returns have different relations. The positive relation is mainly driven by stocks with low past returns, while the negative relation is result from stocks with high past returns. Additionally, the relation is very sensitive to the measurement frequency of idiosyncratic volatility, and the daily realized idiosyncratic volatility measure is a better proxy for the expected idiosyncratic volatility than the monthly measure. By employing an exponential generalized autoregressive conditional heteroskedascticity-in-mean (EGARCH-M) model, this paper finds a strong positive relation between time-varying risk premium and idiosyncratic volatility for portfolios containing stocks with low past returns and small portfolio, and a negative relation for growth portfolio.
Book Synopsis The Conditional Pricing of Systematic and Idiosyncratic Risk in the U.K. Equity Market by : John Cotter
Download or read book The Conditional Pricing of Systematic and Idiosyncratic Risk in the U.K. Equity Market written by John Cotter and published by . This book was released on 2014 with total page 20 pages. Available in PDF, EPUB and Kindle. Book excerpt: We test whether firm idiosyncratic risk is priced in a large cross-section of U.K. stocks. A distinguishing feature of our paper is that our tests allow for a conditional relationship between systematic risk (beta) and returns in our tests, i.e., conditional on whether the excess market return is positive or negative. We find strong evidence in support of a conditional beta/return relationship which in turn reveals conditionality in the pricing of idiosyncratic risk. We find that idiosyncratic risk is significantly negatively priced in stock returns in down-markets. Although perhaps initially counter-intuitive, we describe the theoretical support for such a finding in the literature. Our results also reveal a strong role for liquidity, size and momentum factors in explaining the cross-section of U.K. stock returns.
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 Idiosyncratic Volatility, Stock Market Volatility, and Expected Stock Returns by : Hui Guo
Download or read book Idiosyncratic Volatility, Stock Market Volatility, and Expected Stock Returns written by Hui Guo and published by . This book was released on 2005 with total page 44 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Idiosyncratic Volatility vs. Liquidity? Evidence from the U.S. Corporate Bond Market by : Madhu Kalimipalli
Download or read book Idiosyncratic Volatility vs. Liquidity? Evidence from the U.S. Corporate Bond Market written by Madhu Kalimipalli and published by . This book was released on 2011 with total page 53 pages. Available in PDF, EPUB and Kindle. Book excerpt: Our main objective in this paper is to determine empirically the extent to which fixed-income investors are concerned about equity volatility and bond liquidity in corporate bond spreads. We extend Campbell and Taksler (2003) by conditioning for underlying bond liquidity, and exploring the relative contribution of idiosyncratic equity volatility and bond liquidity in the cross-sectional pricing of corporate bond spreads. Portfolio analysis and Fama-Macbeth regressions reveal that while both volatility and liquidity effects are significant, volatility (representing ex-ante credit shock) has the first-order impact, and liquidity (represented by bond characteristics and price impact measure) has the secondary impact on bond spreads. Conditional analysis further reveals that distressed bonds and distress regimes are both associated with significantly higher impact of credit and liquidity shocks. However, the relative impact of these shocks varies. Volatility effects are more prominent for distressed bonds and during high-distress regimes; liquidity effects are stronger for less distressed bonds and during low-distress regimes. Our findings also indicate that, unlike equity markets, idiosyncratic risk does not subsume the information in liquidity in explaining corporate bond spreads.
Book Synopsis Essays on Idiosyncratic Volatility and Asset Pricing by : Fatma Sonmez Saryal
Download or read book Essays on Idiosyncratic Volatility and Asset Pricing written by Fatma Sonmez Saryal and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: In this thesis, I study three aspects of idiosyncratic volatility. First, I examine the relation between idiosyncratic volatility and future stock returns. Next, I examine the share price effect and its interaction with the idiosyncratic volatility on stock returns. Finally, I examine the time series pattern of monthly aggregate monthly idiosyncratic volatility. In the first chapter, I examine the relation between idiosyncratic volatility and future stock returns. In their paper, Ang, Hodrick, Xing, and Zhang [AHXZ (2006)] show that idiosyncratic volatility is inversely related to future stock returns: low idiosyncratic volatility stocks earn higher returns than do high idiosyncratic volatility stocks. The main contribution of this paper is to provide evidence that it is the month to month changes in idiosyncratic volatility that produce AHXZ's results. More specifically, a portfolio of stocks that move from Quintile 1 (low idiosyncratic volatility) to Quintile 5 (high idiosyncratic volatility) earns an average risk-adjusted return of 5.64% per month in the month of the change. Whereas, a portfolio of stocks that move from the highest to the lowest idiosyncratic volatility quintiles earns -0.94% per month in the month of the change. Eliminating all firm-month observations with idiosyncratic volatility quintile changes, I find the opposite results to AHXZ: it is persistently low idiosyncratic volatility stocks that earn lower returns than do persistently high idiosyncratic volatility stocks. I find that many of the extreme changes in idiosyncratic volatility are related to business events. In general, the pattern usually observed is that an announcement or an event increases uncertainty about a stock and hence, its idiosyncratic volatility increases. After the event, uncertainty is resolved and the stock returns to a lower idiosyncratic volatility quintile. In the second chapter, I examine how the level of the share price interacts with idiosyncratic volatility to affect future stock returns. Ignoring transaction costs, a trading strategy that is long high-priced and short low-priced stocks earns positive abnormal returns with respect to the Fama-French (1992) three factor model. However, the observed positive abnormal returns are less significant if momentum is taken into account via the Carhart (1997) four factor model. Also the relation between idiosyncratic volatility and future stock returns differs for price sorted portfolios: it is negative for low and mid-priced stocks but positive for high-priced ones. These results are robust for low and-mid-priced stocks even after momentum is included. However, the positive relation for high-priced stocks disappears due to relatively large loadings on momentum for high idiosyncratic volatility stocks. I also show that skewness and momentum are significant determinants of idiosyncratic volatility for low-priced stocks and high-priced stocks respectively. One implication is that the importance of idiosyncratic volatility for future stock returns may in part be due its role as a disguised risk factor: either for momentum for high-priced stocks and skewness for low and mid-priced stocks. In the third chapter, I investigate the time series pattern of aggregate monthly idiosyncratic volatility. It has been shown that new riskier listings in the US stock markets are a reason for the increase in idiosyncratic volatility during the period 1963-2004. First, I show that this is more pronounced for Nasdaq new listings. Second, I show that for Nasdaq, prior to 1994 low-priced new listings became riskier, whereas during the internet bubble period it is the higher-priced listings that became riskier. Third, I show that institutional holdings have increased over time and have had a different impact on each new listing group: a negative for pre-1994 listings and a positive impact for post-1994 listings. Hence, I conclude that the observed time-series pattern of idiosyncratic volatility is a result of the changing nature of Nasdaq's investor clientele.
Book Synopsis Idiosyncratic Return Volatility in the Cross-section of Stocks by : Namho Kang
Download or read book Idiosyncratic Return Volatility in the Cross-section of Stocks written by Namho Kang and published by . This book was released on 2011 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper uncovers the changes in the cross-sectional distribution of idiosyncratic volatility of stocks over the period 1963--2008. The contribution of the top decile to the total market idiosyncratic volatility increased, while the contribution of the bottom decile decreased. We introduce a simple theoretical model showing that larger capital of Long/Short-Equity funds further exacerbates large idiosyncratic shocks but attenuates small idiosyncratic shocks. This effect is stronger for more illiquid stocks. Time-series and cross-sectional results are consistent with the predictions of the model. The results are robust to industry affiliation, stock liquidity, firm size, firm leverage, as well as sign of price change. These findings highlight the roll of hedge funds and other institutional investors in explaining the dynamics of extreme realizations in the cross-section of returns.
Book Synopsis Firm-specific News and Anomalies by : Hai Hoang Van
Download or read book Firm-specific News and Anomalies written by Hai Hoang Van and published by . This book was released on 2019 with total page 0 pages. Available in PDF, EPUB and Kindle. Book excerpt: This study investigates the relation between idiosyncratic volatility and future returns around the firm-specific news announcements in the Korean stock market from July 1995 to June 2018. The excess returns of decile portfolios that are formed by sorting the stocks based on news and non-news idiosyncratic volatility measures. The Fama and French three-factor model is also examined to see whether systematic risk affects news and non-news idiosyncratic volatility profits. The pricing of our news and non-news idiosyncratic volatility are confirmed in the cross-sectional regression using the Fama and MacBeth method. Market beta, size, book to market, momentum, liquidity, and maximum return are controlled to determine robustness. Our empirical evidence suggests that the pricing of the non-news idiosyncratic volatility is more strongly negative compared to the news idiosyncratic volatility, which is contrary to the limited arbitrage explanation for the negative price of the idiosyncratic volatility. We find that the non-news idiosyncratic volatility has a robust negative relation to returns in non-January months. Macro-finance factors drive the conditioned on the missing risk factor hypothesis, the pricing of idiosyncratic volatility. This study contributes to a better understanding of the role of the conditional idiosyncratic volatility in asset pricing. As the Korean stocks provide a fresh sample, our non-U.S. investigation delivers a useful out-of-sample test on the pervasiveness of the non-news volatility effect across the emerging markets.
Book Synopsis Idiosyncratic Risk and Expected Returns by : Wei Liu
Download or read book Idiosyncratic Risk and Expected Returns written by Wei Liu and published by . This book was released on 2017-01-26 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation, "Idiosyncratic Risk and Expected Returns: an Investigation in the Context of Real Estate Investment in China" by Wei, Liu, 刘巍, was obtained from The University of Hong Kong (Pokfulam, Hong Kong) and is being sold pursuant to Creative Commons: Attribution 3.0 Hong Kong License. The content of this dissertation has not been altered in any way. We have altered the formatting in order to facilitate the ease of printing and reading of the dissertation. All rights not granted by the above license are retained by the author. Abstract: In the asset-pricing framework, idiosyncratic risk is the risk that is independent of systematic risk and peculiar to one specific asset or company, it is left with no role in expected returns according to the classic finance theory since it could be completely diversified away. However, in the case investors holding under-diversified portfolios, previous theoretical studies generally demonstrate a positive relationship between idiosyncratic risk and expected returns. However, negative empirical evidences regarding the idiosyncratic risk-return tradeoff have been reported recently in the stock market of the U.S. and China, as well as in several real estate literatures. To reconcile the conflict, this thesis is dedicated to investigate the role of idiosyncratic risk in the context of real estate investment. In the theoretical exploration, an asset-pricing model with short-sales restrictions in the market and heterogeneous beliefs among investors is established. Specifically, a simplified version with only three risky assets, in which two of them are direct and indirect real estate investments, demonstrates when investors endowed with incomplete information setting and under-diversified holdings, idiosyncratic risk would play an important role in the expected returns in equilibrium. Furthermore, the comparative static analysis reveals a positive cross-sectional relationship between idiosyncratic risk and expected returns. In the empirical study, this thesis employs the Fama and French (1992) three-factor model to estimate monthly idiosyncratic volatilities of the Listed Property Companies (LPCs) in the A-share market of China, based on the daily data from May 1999 to Aug 2011. Specifically, for each LPC in each month, its idiosyncratic risk is computed as the standard deviation of the three-factor model's daily residuals. The estimation outputs show that idiosyncratic volatility dominates the LPCs' overall volatility during the study period, and it is features with a distinct pattern when compared to that of the U.S. REITs: the LPCs' idiosyncratic volatilities are significantly higher and more persistent; they are less irrelevant to the firm's market capitalization and present an evident co-movement with the broad market. Hence, this scenario reveals a special interest to further study on the cross-sectional relationship between the LPCs' idiosyncratic risk and their expected returns. In the cross-sectional test, conditional idiosyncratic volatility forecasted by the EGARCH-GED model is employed as the proxy for expected idiosyncratic risk, as the LPCs' lagged idiosyncratic risk is shown to be not a good estimate. Over the study period, a firm positive cross-sectional relationship between idiosyncratic risk and expected returns is documented, after controlling for various pricing factors such as firm size and book-to-market equity ratio, indicators of liquidity and momentum as well as returns reversal effect. This evidence not only confirms the prediction of previous theoretical studies and the model in this thesis, it also suggests a profitable trading strategy based on the idiosyncratic risk of the LPCs. DOI: 10.5353/th_b5108639 Subjects: Real estate investment - China Real estate investment - Rate of return
Book Synopsis Information in the Idiosyncratic Volatility of Small Firms by : David P. Brown
Download or read book Information in the Idiosyncratic Volatility of Small Firms written by David P. Brown and published by . This book was released on 2004 with total page 59 pages. Available in PDF, EPUB and Kindle. Book excerpt: Non-systematic volatilities of small firms are special as predictors of stock returns. They are positively related with future returns on all age and size portfolios. They dominate systematic volatility, big-firm volatility and other volatilities. And there is strong evidence that idiosyncratic risk is priced in small-firm returns. Small-firm volatility as a predictor of big-firm returns is in part a proxy for systematic volatility and consumption-wealth ratio. We rule out several hypotheses, including a liquidity premium, as potential explanations of our results, but not the idea that small-firm idiosyncratic volatility is correlated with the risk of the total investor portfolio, which includes non-equity assets.
