The Effect of COVID-19 on the Relationship between Idiosyncratic Volatility and Expected Stock Returns

Seyed Reza Tabatabaei Poudeh, Sungchul Choi and Chengbo Fu
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Seyed Reza Tabatabaei Poudeh: School of Business, Faculty of Business and Economics, University of Northern British Columbia, Prince George, BC V2N 4Z9, Canada
Sungchul Choi: School of Business, Faculty of Business and Economics, University of Northern British Columbia, Prince George, BC V2N 4Z9, Canada
Chengbo Fu: School of Business, Faculty of Business and Economics, University of Northern British Columbia, Prince George, BC V2N 4Z9, Canada

Risks, 2022, vol. 10, issue 3, 1-11

Abstract: This study examines the effect of the COVID-19 pandemic on the relationship between idiosyncratic volatility and expected stock returns. Using daily stock return data in the US market from the Center for Research in Security Prices (CRSP), we estimate monthly idiosyncratic volatility and investigate the effect of the COVID-19 pandemic at the portfolio and firm level. The results of portfolio analysis and cross-sectional regression show that the relationship between idiosyncratic volatility and subsequent stock returns switches from negative to positive during the pandemic period. Furthermore, we find that the relationship is robust to skewness for the “before the pandemic” and “after pandemic” periods. On the contrary, when we control for the one-month return reversal, the effect of idiosyncratic volatility on the subsequent stock returns becomes insignificant in both periods. Therefore, the short-term return reversal effect is the underlying reason for the relationship switching from negative to positive in the pandemic period. Our results are beneficial for investors and researchers.

Keywords: COVID-19; idiosyncratic volatility; stock returns; return reversal (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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