The Fu (2009) Positive Relation Between Idiosyncratic Volatility and Expected Returns is Due to Look-Ahead Bias

Seongkyu (Gilbert) Park, K. C. John Wei and Linti Zhang

Critical Finance Review, 2023, vol. 12, issue 1-4, 57-124

Abstract: Expected idiosyncratic volatility (IVOL) and its positive relation to expected returns of Fu (2009) can be closely replicated, but only when we include information up to time t to estimate the IVOL at time t. Since this involves look-ahead bias, we re-estimate expected IVOL using information only up to time t−1. We find no significant relation between IVOL and returns, and our results are robust to the sample periods extended to before and after that of Fu (2009). Our findings are consistent with the fact that idiosyncratic risk is not priced.

Keywords: Idiosyncratic volatility; Look-ahead bias; EGARCH (search for similar items in EconPapers)
JEL-codes: G10 G12 (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlcfr:104.00000126

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