Is information risk priced? Evidence from abnormal idiosyncratic volatility

Yung Chiang Yang, Bohui Zhang and Chu Zhang

Journal of Financial Economics, 2020, vol. 135, issue 2, 528-554

Abstract: We propose a new, price-based measure of information risk called abnormal idiosyncratic volatility (AIV) that captures information asymmetry faced by uninformed investors. AIV is the idiosyncratic volatility prior to information events in excess of normal levels. Using earnings announcements as information events, we show that AIV is positively associated with informed return run-ups, abnormal insider trading, short selling, and institutional trading during pre-earnings-announcement periods. We find that stocks with high AIV earn economically and statistically larger future returns than stocks with low AIV. Taken together, our findings support the notion that information risk is priced.

Keywords: Information risk; Idiosyncratic volatility; Earnings announcement; Expected returns (search for similar items in EconPapers)
JEL-codes: G00 G12 G14 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:135:y:2020:i:2:p:528-554

DOI: 10.1016/j.jfineco.2019.06.013

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