Is Information Risk Priced? Evidence from Abnormal Idiosyncratic Volatility

86 Pages Posted: 12 Nov 2018

See all articles by Yung Chiang Yang

Yung Chiang Yang

University College Dublin (UCD) College of Business

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Chu Zhang

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Date Written: November 12, 2018

Abstract

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

Yang, Yung Chiang and Zhang, Bohui and Zhang, Chu, Is Information Risk Priced? Evidence from Abnormal Idiosyncratic Volatility (November 12, 2018). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=3282979

Yung Chiang Yang (Contact Author)

University College Dublin (UCD) College of Business ( email )

Belfield
Dublin, 4
Ireland

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

Chu Zhang

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

Clear Water Bay, Kowloon
Hong Kong

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