Idiosyncratic volatility, returns, and mispricing: No real anomaly in sight

Adam Zaremba (), Anna Czapkiewicz and Barbara Będowska-Sójka

Finance Research Letters, 2018, vol. 24, issue C, 163-167

Abstract: Recent empirical evidence has shown that the relationship between idiosyncratic volatility and a stock's expected return depends on the pricing of the stock: it is negative among overvalued stocks and positive among undervalued ones. We provide both theoretical and numerical evidence that this risk-return relationship might be driven purely by mathematical properties of return distributions. Using a simulation-based approach, we document that even in completely random samples, the correlation between idiosyncratic risk and mean returns depends on the ex-post estimation of abnormal returns.

Keywords: Idiosyncratic volatility; Low-risk anomaly; Abnormal returns; Return predictability; Mispricing; Stock market anomalies; Monte Carlo simulation (search for similar items in EconPapers)
JEL-codes: G12 G14 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S154461231730332X
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:24:y:2018:i:c:p:163-167

DOI: 10.1016/j.frl.2017.09.002

Access Statistics for this article

Finance Research Letters is currently edited by R. Gençay

More articles in Finance Research Letters from Elsevier
Bibliographic data for series maintained by Catherine Liu ().