The Fu (2009) Positive Relation between Idiosyncratic Volatility and Expected Returns Is Due to Look-Ahead Bias

Critical Finance Review, forthcoming

60 Pages Posted: 18 Nov 2019 Last revised: 22 Jul 2020

See all articles by Seongkyu Gilbert Park

Seongkyu Gilbert Park

Hong Kong Polytechnic University

K.C. John Wei

Hong Kong Polytechnic University

Linti Zhang

Hong Kong Polytechnic University, School of Accounting and Finance

Date Written: July 10, 2020

Abstract

Expected idiosyncratic volatility and its positive relation to expected returns of Fu (2009) can be closely replicated, but only when we include information up to time t to estimate the idiosyncratic volatility at time t. Since this involves look-ahead bias, we re-estimate expected idiosyncratic volatility using information only up to time t - 1. We find no significant relation between idiosyncratic volatility and returns, and our results are robust to the sample periods extended to before and after that of Fu (2009). Our findings are consistent with the fact that idiosyncratic risk is not priced.

Keywords: Idiosyncratic Volatility, look-ahed bias

JEL Classification: G10, G12

Suggested Citation

Park, Seongkyu and Wei, Kuo-Chiang (John) and Zhang, Linti, The Fu (2009) Positive Relation between Idiosyncratic Volatility and Expected Returns Is Due to Look-Ahead Bias (July 10, 2020). Critical Finance Review, forthcoming, Available at SSRN: https://ssrn.com/abstract=3482346 or http://dx.doi.org/10.2139/ssrn.3482346

Seongkyu Park (Contact Author)

Hong Kong Polytechnic University ( email )

M850, Li Ka Shing Tower
The Hong Kong Polytechnic University
Hung Hom, Kowloon
Hong Kong
+852 2766 4073 (Phone)

HOME PAGE: http://https://sites.google.com/site/skgilbertpark/

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Linti Zhang

Hong Kong Polytechnic University, School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
77
Abstract Views
804
rank
355,071
PlumX Metrics