 Idiosyncratic volatility: An indicator of noise trading?Tom Aabo, Christos Pantzalis and Jung Chul Park Journal of Banking & Finance, 2017, vol. 75, issue C, 136-151 Abstract: We investigate the market efficiency implications of firm-specific return variation measured by absolute idiosyncratic volatility. We find that the absolute idiosyncratic volatility (the variance of the residual from an asset-pricing model) displays a positive and robust relationship to mispricing, which reflects an increasing role of noise traders. Previous literature has produced similar – or opposing – results. We deepen our understanding of the previous conflicting results by showing that (1) market volatility by itself is associated with mispricing, (2) absolute idiosyncratic volatility is associated with mispricing even when controlling for market volatility, (3) the strength of the association between absolute idiosyncratic volatility and mispricing depends on the level of market volatility, and (4) absolute and relative measures of idiosyncratic volatility have opposing associations with mispricing. Our findings contribute to the existing literature by reconciling the mixed results for the relationship between idiosyncratic volatility and mispricing displayed in the previous literature. Keywords: Idiosyncratic volatility; Market volatility; Equity mispricing; Market efficiency (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:75:y:2017:i:c:p:136-151 DOI: 10.1016/j.jbankfin.2016.11.003 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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