Idiosyncratic volatility, growth options, and the cross-section of returns

Alexander Barinov and Georgy Chabakauri

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The value effect and the idiosyncratic volatility (IVol) discount arise because growth firms and high IVol firms beat the CAPM during periods of increasing aggregate volatility (market volatility and average IVol), that makes their risk low. All else equal, growth options' value increases with volatility, an effect that is stronger for high IVol firms, for which growth options take a larger fraction of the firm value and firm volatility responds more to aggregate volatility changes. The factor model with the market factor, the market volatility risk factor, and the average IVol factor explains the value effect and the IVol discount.

Keywords: Paul; Woolley; Centre (search for similar items in EconPapers)
JEL-codes: G12 G13 (search for similar items in EconPapers)
Pages: 38 pages
Date: 2023-12-01
New Economics Papers: this item is included in nep-rmg
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Published in Review of Asset Pricing Studies, 1, December, 2023, 13(4), pp. 653 – 690. ISSN: 2045-9920

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