Does Expected Idiosyncratic Volatility Explain the Cross-Section of Expected Returns?
59 Pages Posted: 18 Nov 2019 Last revised: 25 Nov 2019
Date Written: November 7, 2019
Expected idiosyncratic volatility and its relation to the expected return of Fu (2009) can be closely replicated, but only when we include all information up to t when estimating the idiosyncratic volatility of t. Since look-ahead bias may exist, we re-estimate the expected idiosyncratic volatility using information only up to t−1. We find no significant relation between idiosyncratic volatility and return, and our results are robust to the sample 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: Suggested Citation