Incomplete Information, Idiosyncratic Volatility and Stock Returns

60 Pages Posted: 7 Sep 2008 Last revised: 5 Jul 2012

See all articles by Tony Berrada

Tony Berrada

University of Geneva - Geneva Finance Research Institute (GFRI); Swiss Finance Institute

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

Multiple version iconThere are 3 versions of this paper

Date Written: December 12, 2011

Abstract

When investors have incomplete information, expected returns, as measured by an econometrician, deviate from those predicted by standard asset pricing models by including a term that is the product of the stock's idiosyncratic volatility and the investors' aggregated forecast errors. If investors are biased this term generates a relation between idiosyncratic volatility and expected stocks returns. Relying on forecast revisions from IBES, we construct a new variable that proxies for this term and show that it explains a signi cant part of the empirical relation between idiosyncratic volatility and stock returns.

Keywords: Idiosyncratic volatility, incomplete information, cross-section of stock returns.

JEL Classification: G12, D83, D92

Suggested Citation

Berrada, Tony and Hugonnier, Julien, Incomplete Information, Idiosyncratic Volatility and Stock Returns (December 12, 2011). Swiss Finance Institute Research Paper No. 08-23. Available at SSRN: https://ssrn.com/abstract=1263822 or http://dx.doi.org/10.2139/ssrn.1263822

Tony Berrada (Contact Author)

University of Geneva - Geneva Finance Research Institute (GFRI) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Julien Hugonnier

Swiss Federal Institute of Technology Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL Dorigny
Extranef
Lausanne, CH-1015
Switzerland

HOME PAGE: http://sfi.epfl.ch/hugonnier

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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