Corporate Hedging and the High Idiosyncratic Volatility Low Return Puzzle

31 Pages Posted: 6 Sep 2017

See all articles by Michael Chng

Michael Chng

Xian Jiaotong Liverpool University; Department of Finance, Deakin University

Victor Fang

Deakin University

Hong Feng Zhang

Deakin University - Deakin Business School

Vincent Xiang

Deakin University-Department of Finance

Date Written: September 2017

Abstract

The literature offers various explanations to either support or refute the Ang et al. ([Ang, A., 2006]) high idiosyncratic volatility low return puzzle. Fu ([Fu, F., 2009]) finds a significantly positive contemporaneous relation between return and exponential generalized autoregressive conditional heteroskedastic idiosyncratic volatility. We use corporate hedging to shed light on this puzzle. Conceptually, idiosyncratic volatility matters to investors who face limits to diversification. But limits to diversification become less relevant for firms that consistently hedge. We confirm the main finding in Fu ([Fu, F., 2009]), but only for firms that do not consistently hedge. For firms that adopt a consistent hedging policy, idiosyncratic volatility, whether contemporaneous or lagged, is insignificant in Fama–MacBeth regressions, controlling for size, book‐to‐market, momentum, liquidity, and industry effects.

Suggested Citation

Chng, Michael and Fang, Victor and Zhang, Hong Feng and Xiang, Vincent, Corporate Hedging and the High Idiosyncratic Volatility Low Return Puzzle (September 2017). International Review of Finance, Vol. 17, Issue 3, pp. 395-425, 2017. Available at SSRN: https://ssrn.com/abstract=3032179 or http://dx.doi.org/10.1111/irfi.12109

Michael Chng (Contact Author)

Xian Jiaotong Liverpool University ( email )

BB520, 111 Ren Ai Lu
Higher Education Zone, SIP
Suzhou, Jiangsu 215123
China

Department of Finance, Deakin University ( email )

75 Pigdons Road
Victoria, Victoria 3216
Australia

Victor Fang

Deakin University ( email )

School of Acc Economics Finance
Burwood Highway
Burwood, Victoria 3215
Australia
92446919 (Phone)

HOME PAGE: http://www.deakin.edu.au

Hong Feng Zhang

Deakin University - Deakin Business School ( email )

221 Burwood Highway
Burwood, Victoria 3215
Australia

Vincent Xiang

Deakin University-Department of Finance ( email )

Deakin University
221 Burwood Highway
Burwood, Victoria 3125
Australia

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