Idiosyncratic Volatility, Fundamentals, and Institutional Herding: Evidence from the Japanese Stock Market
29 Pages Posted: 15 Feb 2005
Date Written: March 14, 2005
We offer evidence at both portfolio level and firm level that variations in idiosyncratic volatility are related to both behavioral and fundamental factors. Using Japanese data from 1975 to 2003, we show that both institutional herding and firm earnings are positively related to idiosyncratic volatility. We reject the hypothesis that institutional investors herd toward stocks with high idiosyncratic volatility and systematic risk. Our results suggest that a behavior story may explain the negative premium earned by high volatility stocks found by Ang et al. (2004). In addition to cross sectional results, we present preliminary results on the co-movement of dispersions of change in institutional ownership and return-on-asset with the market aggregate idiosyncratic volatility in the Japanese market. Our results, when related to evidence from the US market, suggest that investor behavior and stock fundamentals may both help explain the time-series pattern of market aggregate idiosyncratic volatility.
Keywords: Idiosyncratic volatility, Herding, Firm Earnings
JEL Classification: G10, G20
Suggested Citation: Suggested Citation