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Impact of idiosyncratic volatility on stock returns: A cross-sectional study

Serguey Khovansky and Oleksandr Zhylyevskyy ()

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

Abstract: This paper proposes a new approach to estimate the idiosyncratic volatility premium. In contrast to the popular two-pass regression method, this approach relies on a novel GMM-type estimation procedure that uses only a single cross-section of return observations to obtain consistent estimates. Also, it enables a comparison of idiosyncratic volatility premia estimated using stock returns with different holding periods. The approach is empirically illustrated by applying it to daily, weekly, monthly, quarterly, and annual US stock return data over the course of 2000–2011. The results suggest that the idiosyncratic volatility premium tends to be positive on daily return data, but negative on monthly, quarterly, and annual data. They also indicate the presence of a January effect.

Keywords: Idiosyncratic volatility; Idiosyncratic volatility premium; Cross-section of stock returns; Generalized method of moments (search for similar items in EconPapers)
JEL-codes: C21 G12 (search for similar items in EconPapers)
Date: 2013-06-05
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Published in Journal of Banking & Finance, August 2013, vol. 37 no. 8, pp. 3064-3075

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http://www.sciencedirect.com/science/article/pii/S0378426613001313

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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:35915

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