Price informativeness: a potential explanation for the idiosyncratic volatility puzzle

Jinyong Kim and Yongsik Kim

Applied Economics Letters, 2023, vol. 30, issue 16, 2264-2269

Abstract: Price informativeness is the amount of private information incorporated into stock prices and measured by $${R^2}$$R2 from regressions of stock returns on systematic risk factors. While $${R^2}$$R2 is closely related with idiosyncratic volatility, it is not interchangeable because magnitude of systematic volatility simultaneously changes. By controlling for the systematic volatility using the double-sorting portfolio approach, we suggest a potential involvement of price informativeness with the idiosyncratic volatility puzzle. Both cross-sectional evidence of monotonic and inverse relationship between idiosyncratic volatility and $${R^2}$$R2 and time-series evidence of disappearing alphas of the low-minus-high idiosyncratic volatility portfolios during recessions support an explanation of the idiosyncratic volatility puzzle in association with price informativeness.

Date: 2023
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DOI: 10.1080/13504851.2022.2096854

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