Expected Volatility, Unexpected Volatility, and the Cross-section of Stock Returns
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.
Finance and Financial Management | Portfolio and Security Analysis
Journal of Financial Research
Wiley: 24 months
CHUA, Choong Tze; GOH, Choo Yong, Jeremy; and ZHANG, Zhe.
Expected Volatility, Unexpected Volatility, and the Cross-section of Stock Returns. (2010). Journal of Financial Research. 33, (2), 103-123. Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/4877
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