Title

Expected Volatility, Unexpected Volatility, and the Cross-section of Stock Returns

Publication Type

Journal Article

Publication Date

6-2010

Abstract

The existing literature finds conflicting results on the cross-sectional relation between expected returns and idiosyncratic volatility. We contend that at the firm level, the sample correlation between unexpected returns and expected idiosyncratic volatility can cloud the true relation between the expected return and expected idiosyncratic volatility. We show strong evidence that unexpected idiosyncratic volatility is positively related to unexpected returns. Using unexpected idiosyncratic volatility to control for unexpected returns, we find expected idiosyncratic volatility to be significantly and positively related to expected returns. This result holds after controlling for various firm characteristics, and it is robust across different sample periods. © 2010 The Southern Finance Association and the Southwestern Finance Association.

Discipline

Finance and Financial Management | Portfolio and Security Analysis

Research Areas

Finance

Publication

Journal of Financial Research

Volume

33

Issue

2

First Page

103

Last Page

123

ISSN

0270-2592

Identifier

10.1111/j.1475-6803.2010.01264.x

Publisher

Wiley: 24 months

Additional URL

http://dx.doi.org/10.1111/j.1475-6803.2010.01264.x

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