Is Information Risk Priced? Evidence from Abnormal Idiosyncratic Volatility
86 Pages Posted: 12 Nov 2018
Date Written: November 12, 2018
We propose a new, price-based measure of information risk called abnormal idiosyncratic volatility (AIV) that captures information asymmetry faced by uninformed investors. AIV is the idiosyncratic volatility prior to information events in excess of normal levels. Using earnings announcements as information events, we show that AIV is positively associated with informed return run-ups, abnormal insider trading, short selling, and institutional trading during pre-earnings-announcement periods. We find that stocks with high AIV earn economically and statistically larger future returns than stocks with low AIV. Taken together, our findings support the notion that information risk is priced.
Keywords: Information Risk, Idiosyncratic Volatility, Earnings Announcement, Expected Returns
JEL Classification: G00, G12, G14
Suggested Citation: Suggested Citation