 Is idiosyncratic volatility related to returns? Evidence from a subset of firms with quality idiosyncratic volatility estimatesMikael Bergbrant and Haimanot Kassa Journal of Banking & Finance, 2021, vol. 127, issue C Abstract: The empirical relation between idiosyncratic volatility (IVOL) and returns is mixed. Ang et al. (2006, 2009) report a negative relation using lagged realized IVOL, but Fu (2009) shows that this measure is a poor proxy for expectations and proposes using forecasts from EGARCH models which results in a positive relation. However, recent studies show that this positive relation disappears when using out-of-sample EGARCH models to generate the forecasts. We show that expected IVOL proxies used in the prior literature are noisy and propose using combinations of out-of-sample IVOL forecasts generated by different EGARCH models that pass basic diagnostic tests. For the sample for which these high-quality proxies can be created, we find a significant positive relation with returns. The magnitude is both statistically and economically meaningful as firms with expected idiosyncratic volatility of one standard deviation above the mean have expected returns that are approximately 3.4% to 4.1% higher per year. Keywords: Idiosyncratic volatility; Priced risk factors; GARCH; EGARCH; Conditional expected volatility; Conditional error variance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:127:y:2021:i:c:s0378426621000844 DOI: 10.1016/j.jbankfin.2021.106126 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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