Another Look at Idiosyncratic Volatility and Expected Returns

Journal Of Investment Management (JOIM), Fourth Quarter 2011

Posted: 25 May 2012

See all articles by Victor Huang

Victor Huang

affiliation not provided to SSRN

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

affiliation not provided to SSRN

Date Written: 2011

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 nonJanuary 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, January effect, return reversals

JEL Classification: G00

Suggested Citation

Huang, Victor and Liu, Qianqiu and Rhee, S. Ghon and Zhang, Liang, Another Look at Idiosyncratic Volatility and Expected Returns (2011). Journal Of Investment Management (JOIM), Fourth Quarter 2011. Available at SSRN: https://ssrn.com/abstract=2066080

Victor Huang (Contact Author)

affiliation not provided to SSRN ( email )

Qianqiu Liu

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

affiliation not provided to SSRN ( email )

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