Financial Distress and Idiosyncratic Volatility: An Empirical Investigation

28 Pages Posted: 7 Mar 2007

See all articles by Lorán Chollete

Lorán Chollete

UiS Business School

Jing Chen

Columbia University - Columbia Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 21, 2006

Abstract

We address the twin puzzles of anomalously low returns for high idiosyncratic volatility and high distress risk stocks, documented by Ang, Hodrick, Xing and Zhang (2006) and Campbell, Hilscher and Szilagyi (2005), respectively. We accomplish two objectives in this study. First, we investigate the link between idiosyncratic volatility and distress risk and find that the idiosyncratic volatility effect exists only conditionally on high distress risk. Second, using a corrected single-beta CAPM model, we provide a rational explanation for the twin puzzles. Joint statistical tests cannot reject the null hypothesis of zero abnormal returns across the idiosyncratic volatility and distress risk portfolios, for the corrected model.

Keywords: Distress risk, idiosyncratic volatility, single-beta CAPM

Suggested Citation

Chollete, Loran and Chen, Jing, Financial Distress and Idiosyncratic Volatility: An Empirical Investigation (July 21, 2006). NHH Finance & Management Science Discussion Paper No. 8/2006, Available at SSRN: https://ssrn.com/abstract=968604 or http://dx.doi.org/10.2139/ssrn.968604

Loran Chollete (Contact Author)

UiS Business School ( email )

PB 8002
Stavanger, 4036
Norway

Jing Chen

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

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