39 Pages Posted: 21 Nov 2014 Last revised: 24 May 2017
Date Written: May 23, 2017
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: 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