Abstract

http://ssrn.com/abstract=2199749
 
 

References (75)



 
 

Footnotes (33)



 


 



Stochastic Idiosyncratic Operating Risk and Real Options: Implications for Stock Returns


Harjoat Singh Bhamra


University of British Columbia (UBC) - Sauder School of Business

Kyung Hwan Shim


University of New South Wales (UNSW)

November 24, 2013

2013 Adam Smith Asset Pricing Conference in Oxford
China International Conference in Finance 2013 Annual Meetings in Shanghai
Northern Finance Association 2013 Annual Meetings in Quebec
2013 Tel Aviv University Finance Conference, Forthcoming

Abstract:     
We combine real options and stochastic idiosyncratic operating risk in a simple equity valuation model of firms to capture the cross-sectional variation of stock returns associated with idiosyncratic return volatility. Our model is able to simultaneously explain two main disparate empirical anomalies: the positive contemporaneous relation between risk-adjusted returns and changes in idiosyncratic return volatility, and the poor risk-adjusted performance of stocks with high idiosyncratic risks, among some others. The model further predicts that (i) risk-adjusted returns increase (decrease) following large rises (drops) in idiosyncratic return volatility – the switch effect – and that (ii) the anomalies and the switch effect are stronger for firms that are more abundant in real options and undergo larger changes in idiosyncratic return volatility. Simulations and empirical analysis strongly support these predictions.

Number of Pages in PDF File: 78

Keywords: Idiosyncratic return volatility, cross section of stock returns, asset pricing, real options, growth options, stochastic volatility, regime switching, mixed jump-diffusion processes

JEL Classification: G00, G10, G12, G13, G19, G30, G31

working papers series


Download This Paper

Date posted: January 12, 2013 ; Last revised: November 29, 2013

Suggested Citation

Bhamra, Harjoat Singh and Shim, Kyung Hwan, Stochastic Idiosyncratic Operating Risk and Real Options: Implications for Stock Returns (November 24, 2013). 2013 Adam Smith Asset Pricing Conference in Oxford ; Northern Finance Association 2013 Annual Meetings in Quebec; 2013 Tel Aviv University Finance Conference, Forthcoming. Available at SSRN: http://ssrn.com/abstract=2199749 or http://dx.doi.org/10.2139/ssrn.2199749

Contact Information

Harjoat Singh Bhamra
University of British Columbia (UBC) - Sauder School of Business ( email )
2053 Main Mall
Vancouver, BC V6T 1Z2
Canada
Kyung Hwan Shim (Contact Author)
University of New South Wales (UNSW) ( email )
306 Level 3 ASB
UNSW Kensington Campus
UNSW Sydney, NSW 2052
Australia
61293855852 (Phone)
Feedback to SSRN


Paper statistics
Abstract Views: 469
Downloads: 114
Download Rank: 137,548
References:  75
Footnotes:  33

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo2 in 0.500 seconds