Another Look at Idiosyncratic Volatility and Expected Returns

Journal of Investment Management, Vol. 9, No. 4, 2011, 26-51

48 Pages Posted: 20 Mar 2009 Last revised: 19 May 2012

See all articles by Wei Huang

Wei Huang

University of Hawaii at Manoa - Shidler College of Business

Qianqiu Liu

University of Hawaii at Manoa - Shidler College of Business

S. Ghon Rhee

University of Hawaii - Shidler College of Business; University of Hawaii - Department of Financial Economics and Institutions

Liang Zhang

University of Hawaii

Date Written: January 1, 2009

Abstract

We conduct comprehensive analyses of the return characteristics of stock portfolios sorted by idiosyncratic volatility. We show that the relationship between idiosyncratic volatility and expected stock returns depends on whether the portfolio is composed of stocks with extreme performance and whether the returns are computed over January and non-January months. The dominance of loser stocks in December and a reversal effect in the subsequent month lead to a positive relation between idiosyncratic volatility and portfolio returns in January. Whereas for other months, the impact of past winner stocks dominates and a negative relation is observed due to the return reversal of these winner stocks. Our study contributes to the understanding of how January effect and short-term return reversal can lead to different relation between idiosyncratic volatility and expected returns.

Keywords: idiosyncratic volatility, return reversals

JEL Classification: G12, G14

Suggested Citation

Huang, Wei and Liu, Qianqiu and Rhee, S. Ghon and Zhang, Liang, Another Look at Idiosyncratic Volatility and Expected Returns (January 1, 2009). Journal of Investment Management, Vol. 9, No. 4, 2011, 26-51. Available at SSRN: https://ssrn.com/abstract=1364571 or http://dx.doi.org/10.2139/ssrn.1364571

Wei Huang

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way
Honolulu, HI 96822
United States
808-956-7679 (Phone)
808-956-9887 (Fax)

Qianqiu Liu (Contact Author)

University of Hawaii at Manoa - Shidler College of Business ( email )

2404 Maile Way, E602f
Honolulu, HI 96822
United States
808-956-8736 (Phone)
808-956-9887 (Fax)

S. Ghon Rhee

University of Hawaii - Shidler College of Business ( email )

2404 Maile Way
C-304, FEI/CBA
Honolulu, HI 96822
United States

University of Hawaii - Department of Financial Economics and Institutions ( email )

United States

Liang Zhang

University of Hawaii ( email )

2404 Maile Way,
Honolulu, HI 96822
United States

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