Explaining the idiosyncratic volatility puzzle using Stochastic Discount Factors

Fousseni Chabi-Yo

Journal of Banking & Finance, 2011, vol. 35, issue 8, 1971-1983

Abstract: I use Stochastic Discount Factors to examine the sources of the idiosyncratic volatility premium. I find that non-zero risk aversion and firms' non-systematic coskewness determine the premium on idiosyncratic volatility risk. The firm's non-systematic coskewness measures the comovement of the asset's volatility with the market return. When I control for the non-systematic coskewness factor, I find no significant relation between idiosyncratic volatility and stock expected returns. My results are robust across different sample periods and firm characteristics.

Keywords: Stochastic; discount; factor; Non-systematic; coskewness; Idiosyncratic; volatility; Cross-section; of; stock; returns (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (12)

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