Is There a Volatility Puzzle in the Hong Kong Stock Market?
40 Pages Posted: 16 Jan 2013
Date Written: January 15, 2013
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
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