Revisiting Idiosyncratic Volatility and Stock Returns
29 Pages Posted: 1 Aug 2013
Date Written: April 1, 2013
This paper’s aim is to revisit the relation between idiosyncratic volatility and future stock returns. There are three key findings: First, we confirm earlier studies which show a negative relation. Further we show that it is the month to month changes in idiosyncratic volatility that produce this observed relation. More specifically, a portfolio of stocks that move from a lower (higher) idiosyncratic volatility quintile to higher (lower) one earns positive (negative) abnormal returns. Eliminating all firm-month observations with idiosyncratic volatility quintile changes, we find a positive relation. Second, we link our findings with corporate related events. Third, we find that after 2000, the idiosyncratic volatility effect disappears.
Keywords: Idiosyncratic volatility, stock abnormal returns, change in idiosyncratic volatility
JEL Classification: G12, G13
Suggested Citation: Suggested Citation