Relation between Time-Series and Cross-Sectional Effects of Idiosyncratic Variance on Stock Returns

FRB of St. Louis Working Paper No. 2006-036A

48 Pages Posted: 25 May 2006 Last revised: 9 Apr 2010

See all articles by Hui Guo

Hui Guo

University of Cincinnati - Department of Finance - Real Estate

Robert Savickas

George Washington University - School of Business - Department of Finance

Date Written: March 15, 2010

Abstract

Consistent with the post-1962 U.S. evidence by Ang, Hodrick, Xing, and Zhang [Ang, A., Hodrick, R., Xing Y., Zhang, X., 2006. The cross-section of volatility and expected returns. Journal of Finance 51, 259-299.], we find that stocks with high idiosyncratic variance (IV) have low CAPM-adjusted expected returns in both pre-1962 U.S. and modern G7 data. We also test in three ways the conjecture that IV is a proxy of systematic risk. First, the return difference between low and high IV stocks -- that we dub as IVF -- is a priced factor in the cross-section of stock returns. Second, loadings on lagged market variance and lagged average IV account for a significant portion of variation in average returns on portfolios sorted by IV. Third, the variance of IVF correlates closely with average IV, and the two variables have similar explanatory power for the time-series and cross-sectional stock returns.

Keywords: Stock return predictability, Average idiosyncratic variance, Stock market variance, Cross-section of stock returns, Value premium, CAPM

JEL Classification: G1

Suggested Citation

Guo, Hui and Savickas, Robert, Relation between Time-Series and Cross-Sectional Effects of Idiosyncratic Variance on Stock Returns (March 15, 2010). FRB of St. Louis Working Paper No. 2006-036A. Available at SSRN: https://ssrn.com/abstract=904207 or http://dx.doi.org/10.2139/ssrn.904207

Hui Guo (Contact Author)

University of Cincinnati - Department of Finance - Real Estate ( email )

College of Business
418 Carl H. Lindner Hall
Cincinnati, OH 45221
United States
513.556.7077 (Phone)
513.556.0979 (Fax)

HOME PAGE: http://homepages.uc.edu/~guohu/

Robert Savickas

George Washington University - School of Business - Department of Finance ( email )

Funger Hall, Suite 501R
2201 G Street, N.W.
Washington, DC 20052
United States
202-994-8936 (Phone)
202-994-5014 (Fax)

HOME PAGE: http://savickas.net/

Register to save articles to
your library

Register

Paper statistics

Downloads
603
Abstract Views
2,605
rank
44,763
PlumX Metrics