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

35 Pages Posted: 26 Oct 2011

See all articles by Choong Tze Chua

Choong Tze Chua

Singapore Management University

Jeremy Goh

Singapore Management University - Lee Kong Chian School of Business

Zhe Zhang

Singapore Management University - Lee Kong Chian School of Business

Date Written: 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 is robust across different sample periods.

Keywords: Idiosyncratic volatility, unexpected volatility

JEL Classification: G10, G11, G12

Suggested Citation

Chua, Choong Tze and Goh, Jeremy and Zhang, Zhe, Expected Volatility, Unexpected Volatility, and the Cross-Section of Stock Returns (2010). Journal of Financial Research, Vol. 33, No. 2, 2010, Available at SSRN: https://ssrn.com/abstract=1949853

Choong Tze Chua

Singapore Management University ( email )

50 Stamford Rd.
Singapore 912409, 178899
Singapore

Jeremy Goh

Singapore Management University - Lee Kong Chian School of Business ( email )

469 Bukit Timah Road
Singapore 912409
Singapore

Zhe Zhang (Contact Author)

Singapore Management University - Lee Kong Chian School of Business ( email )

Lee Kong Chian School of Business
50 Stamford Road
Singapore, 178899
Singapore

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