The idiosyncratic volatility of volatility effect in the A-share market: An interpretation based on heterogeneous variance beliefs

Zhijun Hu, Xiang Gao and Aifan Ling

Finance Research Letters, 2025, vol. 75, issue C

Abstract: Employing a stochastic volatility model, we theoretically demonstrate that investors with heterogeneous variance beliefs require lower risk premiums as idiosyncratic volatility of volatility increases in China`s A-share market. Empirical analysis confirms this, showing that the monthly average return of the quintile with the highest idiosyncratic volatility of volatility is significantly lower by 0.766 % compared to the lowest quintile. This negative risk premium phenomenon remains robust after controlling for common risk factors and firm characteristics. Our research deepens the comprehension of asset pricing mechanisms in the A-share market and offers new insights for the development of factor pricing models.

Keywords: Idiosyncratic volatility of volatility; Heterogeneous variance beliefs; Negative premium phenomenon; Stochastic volatility (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:75:y:2025:i:c:s1544612325001163

DOI: 10.1016/j.frl.2025.106851

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