Incomplete information, idiosyncratic volatility and stock returns

Tony Berrada and Julien Hugonnier

No 08-23, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We develop a q-theoretic model of investment under incomplete information that explains the link between idiosyncratic volatility and stock returns. When calibrated to match properties of the US business cycles as well as various firms and industry characteristics, the model generates a negative relation between idiosyncratic volatility and stock returns. We show that conditional on earning surprises, the link is positive after good news and negative after bad news. This result provides new insights on the nature of stock return predictability.

Keywords: Idiosyncratic volatility; incomplete information; cross-section of returns; q-theory of investment (search for similar items in EconPapers)
JEL-codes: D83 D92 G12 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2008-07
New Economics Papers: this item is included in nep-bec and nep-fmk
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Related works:
Journal Article: Incomplete information, idiosyncratic volatility and stock returns (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp0823

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