Idiosyncratic Return Volatility, Uncertainty, and Asset Pricing Implications

48 Pages Posted: 21 Aug 2017 Last revised: 16 Mar 2018

Date Written: March 12, 2018


In this study, we decompose idiosyncratic stock return volatility (IVOL) into uncertainty and residual volatility, and find that the negative IVOL-return relation primarily comes from the uncertainty component. Further analysis indicates that firm uncertainty increases are associated with negative contemporaneous stock returns. High uncertainty firms also have lower firm values and higher expected returns, and exhibit more asymmetric price responses to good/bad market states. All of these are consistent with ambiguity aversion modeled by Epstein and Schneider (2008). Our study documents novel valuation and return patterns associated with the uncertainty content embedded in IVOL. Our findings suggest that uncertainty offers a new channel to explore the IVOL puzzle. It may also help interpret the common factor in IVOL documented in the recent literature.

Suggested Citation

Liang, Claire Y.C. and Tang, Zhenyang, Idiosyncratic Return Volatility, Uncertainty, and Asset Pricing Implications (March 12, 2018). Available at SSRN: or

Claire Y.C. Liang (Contact Author)

Georgetown University ( email )

Washington, DC 20057
United States

Zhenyang Tang

Clark University ( email )

950 Main Street
Worcester, MA 01610
United States

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