Can the portfolio excess growth rate explain the predictive power of idiosyncratic volatility?

Daniel Mantilla-Garcia, Juliana Malagon and Julian R. Aldana-Galindo
Authors registered in the RePEc Author Service: Daniel Mantilla Garcia ()

Finance Research Letters, 2022, vol. 47, issue PA

Abstract: We unveil a theoretical link between the portfolio excess growth rate (EGR) and two measures of average idiosyncratic volatility (IdVol) and confirm it empirically for the U.S. equity market. We find that the EGR and average IdVol are positively related with subsequent market returns over short horizons. A theoretical analysis of EGR properties explains why the relationship between average IdVol and future portfolio returns changes for different weighting schemes, horizons, and portfolio rebalancing frequencies. Furthermore, it explains why the outperformance of low versus high IdVol portfolios is completely reversed at higher rebalancing frequencies when using equal weights.

Keywords: Idiosyncratic volatility puzzle; Return predictability; Cross-sectional variance; Excess growth rate (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:47:y:2022:i:pa:s1544612321005286

DOI: 10.1016/j.frl.2021.102577

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