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The pricing effect of the common pattern in firm-level idiosyncratic volatility: Evidence from A-Share stocks of China

Zhi Su, Tengjia Shu and Libo Yin

Physica A: Statistical Mechanics and its Applications, 2018, vol. 497, issue C, 218-235

Abstract: Inspired by Herskovic et al. (2016), we investigate the pricing effect of the firm-level common idiosyncratic volatility (CIV) in China’s A-Share market. Return tests indicate that lower CIV risk loadings bring higher returns significantly, while the pricing function of market volatility (MV) is inconsistent. Strategy that goes long the highest CIV-beta quintile and short the lowest CIV-beta quintile brings an annualized average return of 5%–7%. Our findings supplement Herskovic et al. (2016) by confirming a significantly negative relationship between CIV and stock returns in a developing market.

Keywords: Idiosyncratic volatility; Cross section of stock returns; Firm-level volatility; Common trend; A-Share stock of China (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:phsmap:v:497:y:2018:i:c:p:218-235