Does Expected Idiosyncratic Volatility Explain the Cross-Section of Expected Returns?

59 Pages Posted: 18 Nov 2019 Last revised: 25 Nov 2019

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: November 7, 2019

Abstract

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

Park, Seongkyu and Wei, Kuo-Chiang (John) and Zhang, Linti, Does Expected Idiosyncratic Volatility Explain the Cross-Section of Expected Returns? (November 7, 2019). 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

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