On the Relation between EGARCH Idiosyncratic Volatility and Expected Stock Returns

50 Pages Posted: 18 Aug 2010 Last revised: 3 Jun 2014

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Haim Kassa

Miami University

Michael F. Ferguson

University of Cincinnati - Department of Finance - Real Estate

Date Written: July 2012

Abstract

A spurious positive relation between EGARCH estimates of expected month t idiosyncratic volatility and month t stock returns arises when the month t return is included in the estimation of model parameters. We illustrate via simulations that this look-ahead bias is problematic for empirically observed degrees of stock return skewness and typical monthly return time series lengths. Moreover, the empirical idiosyncratic-return relation becomes negligible when expected month t idiosyncratic volatility is estimated using returns only upto month t-1.

Keywords: EGARCH, idiosyncratic volatility, cross-section of stock returns

JEL Classification: G1

Suggested Citation

Guo, Hui and Kassa, Haim and Ferguson, Michael F., On the Relation between EGARCH Idiosyncratic Volatility and Expected Stock Returns (July 2012). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1660170 or http://dx.doi.org/10.2139/ssrn.1660170

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Haim Kassa

Miami University ( email )

800 E. Main St
The Farmer School of Business
Oxford, OH 45056
United States
(513) 529-2057 (Phone)
(513) 556-4891 (Fax)

HOME PAGE: http://fsb.miamioh.edu/kassah

Michael F. Ferguson

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business Administration
Cincinnati, OH 45221
United States
513-556-7080 (Phone)

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