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Estimating Idiosyncratic Volatility and Its Effects on a Cross-Section of Returns

Serguey Khovansky and Oleksandr Zhylyevskyy ()

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: We apply a new econometric method -- the generalized method of moments under a common shock -- to estimate idiosyncratic volatility premium and average idiosyncratic stock volatility. In contrast to the popular two-pass estimation approach of Fama and MacBeth (1973), the method requires using only a cross-section of return observations. We apply it to cross-sections of weekly U.S. stock returns in January and October 2008 and fiÂ…nd that during these months, the idiosyncratic volatility premium is nearly always negative and statistically signiÂ…cant. The results also indicate that the average idiosyncratic stock volatility increased by at least 50% between January and October.

Keywords: Generalized method of moments; Idiosyncratic volatility; Cross-section of stock returns; Idiosyncratic volatility premium (search for similar items in EconPapers)
JEL-codes: C21 C51 G12 (search for similar items in EconPapers)
Date: 2012-01-31
New Economics Papers: this item is included in nep-ecm, nep-ets and nep-fmk
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:34990

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