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Idiosyncratic Volatility Puzzle: Influence of Macro-Finance Factors

39 Pages Posted: 21 Nov 2014 Last revised: 24 May 2017

Nektarios Aslanidis

Universitat Rovira Virgili

Charlotte Christiansen

Aarhus University - CREATES

Neophytos Lambertides

Cyprus University of Technology

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping

Date Written: May 23, 2017

Abstract

We analyze the cross-sectional relation between expected idiosyncratic volatility and stock returns. As a novelty, the expected idiosyncratic volatility is obtained by conditioning on macro-finance factors as well as traditional asset pricing factors. The macro-finance factors are constructed from a large pool of macroeconomic and financial variables. When accounting for macro-finance effects in the idiosyncratic volatility, the relation between idiosyncratic volatility and stock returns is positive. The relation between expected idiosyncratic volatility and returns is not caused by business cycle variations. The empirical results are highly robust.

Keywords: Idiosyncratic volatility puzzle; Macro-finance predictors; Factor analysis; Business cycle

JEL Classification: G12; G14

Suggested Citation

Aslanidis, Nektarios and Christiansen, Charlotte and Lambertides, Neophytos and Savva, Christos S., Idiosyncratic Volatility Puzzle: Influence of Macro-Finance Factors (May 23, 2017). Available at SSRN: https://ssrn.com/abstract=2528905 or http://dx.doi.org/10.2139/ssrn.2528905

Nektarios Aslanidis

Universitat Rovira Virgili ( email )

Tarragona
Spain

Charlotte Christiansen (Contact Author)

Aarhus University - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Neophytos Lambertides

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Christos S. Savva

Cyprus University of Technology - Department of Commerce, Finance and Shipping ( email )

Limassol, 3603
Cyprus
00357252349 (Phone)
00357252674 (Fax)

HOME PAGE: http://www.csavva.com

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