Idiosyncratic Volatility and the Cross-Section of Expected Returns

41 Pages Posted: 8 Aug 2006

See all articles by Turan G. Bali

Turan G. Bali

Georgetown University - McDonough School of Business

Nusret Cakici

Fordham university

Multiple version iconThere are 2 versions of this paper

Abstract

This paper examines the cross-sectional relation between idiosyncratic volatility and expected stock returns. The results indicate that (i) data frequency used to estimate idiosyncratic volatility, (ii) weighting scheme used to compute average portfolio returns, (iii) breakpoints utilized to sort stocks into quintile portfolios, and (iv) using a screen for size, price and liquidity play a critical role in determining the existence and significance of a relation between idiosyncratic risk and the cross-section of expected returns. Portfolio-level analyses based on two different measures of idiosyncratic volatility (estimated using daily and monthly data), three weighting schemes (value-weighted, equal-weighted, inverse-volatility-weighted), three breakpoints (CRSP, NYSE, equal-market-share), and two different samples (NYSE/AMEX/NASDAQ and NYSE) indicate that there is no robust, significant relation between idiosyncratic volatility and expected returns.

Keywords: idiosyncratic risk, expected stock returns, size, book-to-market, liquidity

JEL Classification: G10, G11, C13

Suggested Citation

Bali, Turan G. and Cakici, Nusret, Idiosyncratic Volatility and the Cross-Section of Expected Returns. Journal of Financial and Quantitative Analysis (JFQA), Forthcoming, Available at SSRN: https://ssrn.com/abstract=922092

Turan G. Bali (Contact Author)

Georgetown University - McDonough School of Business ( email )

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Washington, DC 20057
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HOME PAGE: https://sites.google.com/a/georgetown.edu/turan-bali

Nusret Cakici

Fordham university ( email )

113 West 60th Street
New York, NY 10023
United States
2017473227 (Phone)
07446 (Fax)

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