Is There a Volatility Puzzle in the Hong Kong Stock Market?

40 Pages Posted: 16 Jan 2013

See all articles by Ji (George) Wu

Ji (George) Wu

Massey University - School of Economics and Finance

Gilbert Nartea

University of Canterbury - College of Business and Law

Date Written: January 15, 2013

Abstract

Recent studies suggest an increasing trend in return idiosyncratic volatility and a ‘puzzling’ negative relationship between idiosyncratic and total volatility and stock returns. We investigate in an emerging market, the time-series behaviour of total and idiosyncratic volatility and their respective relationship with cross-sectional stock returns. First, we find that the time-series behaviour of both total and idiosyncratic volatility is episodic rather than exhibiting a long-term trend and that this episodic behaviour is driven by the level and variability of growth options. Second, we find a significant negative total volatility effect which reverses the apparent negative idiosyncratic volatility effect. Our results are consistent with a market populated by underdiversified risk-averse investors with a preference for high total volatility stocks. Consequently, we suggest that there is neither an idiosyncratic nor a total volatility puzzle. Our study underscores the importance of country verification, especially in emerging markets, of anomalies initially discovered in mature markets.

Keywords: idiosyncratic volatility, total volatility, asset pricing, Hong Kong stock market

Suggested Citation

Wu, Ji (George) and Nartea, Gilbert, Is There a Volatility Puzzle in the Hong Kong Stock Market? (January 15, 2013). Asian Finance Association (AsFA) 2013 Conference. Available at SSRN: https://ssrn.com/abstract=2200823 or http://dx.doi.org/10.2139/ssrn.2200823

Ji (George) Wu (Contact Author)

Massey University - School of Economics and Finance ( email )

Private Bag 102904
North Shore
Auckland, Auckland 0745
New Zealand
+6292127089 (Phone)

Gilbert Nartea

University of Canterbury - College of Business and Law ( email )

Christchurch, 8140
New Zealand

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