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Idiosyncratic Volatility Puzzle: Influence of Macro-Finance Factors

34 Pages Posted: 21 Nov 2014 Last revised: 9 Nov 2017

Nektarios Aslanidis

Universitat Rovira Virgili

Charlotte Christiansen

University of Aarhus - CREATES

Neophytos Lambertides

Cyprus University of Technology

Christos S. Savva

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

Date Written: November 6, 2017

Abstract

We analyze the cross-sectional relation between expected idiosyncratic volatility and stock returns. The expected idiosyncratic volatility is conditioned on macro-finance factors as well as traditional asset pricing factors. The macro-finance factors are constructed from a large set of macroeconomic and financial variables. Our results show that the negative relation between expected idiosyncratic volatility and stock returns reverses to a positive one when accounting for the macro-finance effects. Portfolio analysis shows that the positive relation is economically important. The relation between expected idiosyncratic volatility and returns is not affected by business cycle variations. The empirical results are highly robust.

Keywords: Idiosyncratic volatility puzzle; Macro-finance factors; 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 (November 6, 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)

University of Aarhus - CREATES ( email )

Fuglesangs Alle 4
Aarhus V, DK 8210
Denmark

Neophytos Lambertides

Cyprus University of Technology ( email )

Limassol, 3603
Cyprus

Christos 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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