Idiosyncratic Volatility Measures and Expected Return

37 Pages Posted: 16 Oct 2010

See all articles by Jason Fink

Jason Fink

James Madison University - College of Business

Kristin Fink

James Madison University - College of Business

Hui He

James Madison University

Date Written: October 14, 2010

Abstract

We test whether expected idiosyncratic volatility is related to the cross section of asset returns. We find that, contrary to several recent papers, expected idiosyncratic volatility has no reliable relationship to expected returns. Further, realized contemporaneous idiosyncratic volatility does have a positive relationship with expected returns - this relationship is driven by unexpected idiosyncratic volatility. A look-ahead bias that has been present in recent papers has led to false conclusions about the relationship between expected idiosyncratic volatility and expected return. Our findings are robust to several choices of volatility forecasting models and systematic factor models.

Suggested Citation

Fink, Jason and Fink, Kristin and He, Hui, Idiosyncratic Volatility Measures and Expected Return (October 14, 2010). Available at SSRN: https://ssrn.com/abstract=1692315 or http://dx.doi.org/10.2139/ssrn.1692315

Jason Fink (Contact Author)

James Madison University - College of Business ( email )

Harrisonburg, VA 22807
United States
540-568-8107 (Phone)

Kristin Fink

James Madison University - College of Business ( email )

Harrisonburg, VA 22807
United States

Hui He

James Madison University ( email )

MSC0203
Department of Finance and Business Law
Harrisonburg, VA 22807
United States

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