Incomplete information, idiosyncratic volatility and stock returns

Tony Berrada and Julien Hugonnier

Journal of Banking & Finance, 2013, vol. 37, issue 2, 448-462

Abstract: When investors have incomplete information, expected returns, as measured by an econometrician, deviate from those predicted by standard asset pricing models by including a term that is the product of the stock’s idiosyncratic volatility and the investors’ aggregated forecast errors. If investors are biased this term generates a relation between idiosyncratic volatility and expected stocks returns. Relying on forecast revisions from IBES, we construct a new variable that proxies for this term and show that it explains a significant part of the empirical relation between idiosyncratic volatility and stock returns.

Keywords: Idiosyncratic volatility; Incomplete information; Cross-section of stock returns (search for similar items in EconPapers)
JEL-codes: D83 D92 G12 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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Working Paper: Incomplete information, idiosyncratic volatility and stock returns (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:2:p:448-462

DOI: 10.1016/j.jbankfin.2012.09.004

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