Another Look at Idiosyncratic Volatility and Expected Returns
Journal Of Investment Management (JOIM), Fourth Quarter 2011
Posted: 25 May 2012
Date Written: 2011
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: Suggested Citation