Revisiting Idiosyncratic Volatility and Stock Returns

29 Pages Posted: 1 Aug 2013

See all articles by Fatma Saryal Sonmez

Fatma Saryal Sonmez

Queen's University - Smith School of Business

Date Written: April 1, 2013

Abstract

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

Sonmez, Fatma Saryal, Revisiting Idiosyncratic Volatility and Stock Returns (April 1, 2013). Frontiers in Finance and Economics, Vol. 10, No. 1, 1-29, 2013. Available at SSRN: https://ssrn.com/abstract=2304670

Fatma Saryal Sonmez (Contact Author)

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada

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