Abstract

http://ssrn.com/abstract=783284
 
 

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The Information Content of Idiosyncratic Volatility


George J. Jiang


Washington State University

Danielle Xu


Gonzaga University

Tong Yao


University of Iowa - Henry B. Tippie College of Business

June 1, 2009

Journal of Financial and Quantitative Analysis, 2009, 44(1), 1-28.

Abstract:     
This paper uses adverse selection in corporate information disclosure to explain a recently documented asset pricing anomaly. Ang, Hodrick, Xing, and Zhang (2006a) show that stocks with high idiosyncratic return volatilities tend to have low future returns. In this paper, we find that idiosyncratic volatility is also inversely related to future earning shocks. More importantly, we show that the return predictive power of idiosyncratic volatility is induced by its information content on future earnings. We provide empirical results to support our explanation that firms with poor prospect of future earnings tend to disclose less information, resulting in a higher degree of heterogeneity in investors beliefs, which in turn leads to higher stock return volatility and trading volume. Further analysis suggests that investors tend to underreact to earnings information in idiosyncratic volatility, and the mispricing of idiosyncratic volatility is inversely related to both investor sophistication and stock liquidity.

Number of Pages in PDF File: 28

Keywords: Idiosyncratic Volatility, Corporate Disclosure

JEL Classification: G12, G14

Accepted Paper Series





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Date posted: August 18, 2005 ; Last revised: October 3, 2012

Suggested Citation

Jiang, George J. and Xu, Danielle and Yao, Tong, The Information Content of Idiosyncratic Volatility (June 1, 2009). Journal of Financial and Quantitative Analysis, 2009, 44(1), 1-28.. Available at SSRN: http://ssrn.com/abstract=783284 or http://dx.doi.org/10.2139/ssrn.783284

Contact Information

George Jiang
Washington State University ( email )
Department of Finance and Management Science
College of Business
Pullman, WA 99-4746164
United States
509-3354474 (Phone)
HOME PAGE: http://www.cb.wsu.edu/directory/profile.cfm?emp=jiang_george
Danielle Xu
Gonzaga University ( email )
Spokane, WA 99258
United States
Tong Yao (Contact Author)
University of Iowa - Henry B. Tippie College of Business ( email )
108 Pappajohn Business Building
Iowa City, IA 52242-1000
United States
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