The Time-Series Behavior and Pricing of Idiosyncratic Volatility: Evidence from 1926 to 1962

46 Pages Posted: 8 Apr 2008

See all articles by Paul Brockman

Paul Brockman

Lehigh University - College of Business

Xuemin Sterling Yan

University of Missouri - Columbia

Date Written: March 1, 2008

Abstract

Recent research on idiosyncratic volatility has documented three main empirical findings. First, Campbell, Lettau, Malkiel, and Xu (2001) show that idiosyncratic volatility exhibits an upward trend between 1962 and 1997. Second, Goyal and Santa-Clara (2003) find that aggregate measures of idiosyncratic volatility predict one-month-ahead excess market returns from 1962 to 1999. Third, Ang, Hodrick, Xing, and Zhang (2006) report a negative and significant relation between idiosyncratic volatility and cross-sectional stock returns from 1963 to 2000. We re-examine these three findings using a 37-year holdout sample of daily returns from 1926 to 1962. We find robust empirical evidence of (1) a statistically significant downward trend in idiosyncratic volatility, (2) an insignificant relation between average idiosyncratic volatility and one-month-ahead excess market returns, and (3) a highly significant inverse relation between idiosyncratic volatility and cross-sectional stock returns. These results shed new light on the time-series behavior and pricing of idiosyncratic volatility.

Keywords: Idiosyncratic Volatility, Expected Return, Holdout Sample

JEL Classification: G12, G14

Suggested Citation

Brockman, Paul and Yan, Xuemin Sterling, The Time-Series Behavior and Pricing of Idiosyncratic Volatility: Evidence from 1926 to 1962 (March 1, 2008). Available at SSRN: https://ssrn.com/abstract=1117284 or http://dx.doi.org/10.2139/ssrn.1117284

Paul Brockman

Lehigh University - College of Business ( email )

Bethlehem, PA 18015
United States

Xuemin Sterling Yan (Contact Author)

University of Missouri - Columbia ( email )

Robert J. Trulaske Sr. College of Business
427 Cornell Hall
Columbia, MO 65211-2600
United States
573-884-9708 (Phone)
573-884-6296 (Fax)

HOME PAGE: http://business.missouri.edu/yanx/

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