Financial Distress and Idiosyncratic Volatility: An Empirical Investigation

Jing Chen (jc2017@columbia.edu) and Lorán Chollete (loran.chollete@nhh.no)
Additional contact information
Jing Chen: Columbia University, Graduate School of Business, Postal: Columbia University, Graduate School of Business, 311 Uris Hall, New York, N.Y. 10027, USA, http://www2.gsb.columbia.edu/doctoral/students/cv/jc2017.pdf
Lorán Chollete: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway, http://www.nhh.no/for/cv/chollete-loran.htm

No 2006/8, Discussion Papers from Norwegian School of Economics, Department of Business and Management Science

Abstract: We address the twin puzzles of anomalously low returns for high idiosyncratic volatility and high distress risk stocks, documented by Ang, Hodrick, Xing and Zhang (2006) and Campbell, Hilscher and Szilagyi (2005), respectively. We accomplish two objectives in this study. First, we investigate the link between idiosyncratic volatility and distress risk and find that the idiosyncratic volatility effect exists only conditionally on high distress risk. Second, using a corrected single-beta CAPM model, we provide a rational explanation for the twin puzzles. Joint statistical tests cannot reject the null hypothesis of zero abnormal returns across the idiosyncratic volatility and distress risk portfolios, for the corrected model.

Keywords: Distress risk; idiosyncratic volatility; single-beta CAPM (search for similar items in EconPapers)
JEL-codes: C12 (search for similar items in EconPapers)
Pages: 27 pages
Date: 2006-08-04
New Economics Papers: this item is included in nep-bec, nep-fin, nep-fmk and nep-rmg
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