The Dynamic Relation between Returns and Idiosyncratic Volatility

24 Pages Posted: 17 Sep 2006

See all articles by Xiaoquan Jiang

Xiaoquan Jiang

Florida International University (FIU) - Department of Finance

Bong-Soo Lee

Korea Advanced Institute of Science and Technology (KAIST)

Abstract

We claim that regressing excess returns on one-lagged volatility provides only a limited picture of the dynamic effect of idiosyncratic risk, which tends to be persistent over time. By correcting for the serial correlation in idiosyncratic volatility, we find that idiosyncratic volatility has a significant positive effect. This finding seems robust for various firm size portfolios, sample periods, and measures of idiosyncratic risk. Our findings suggest stock markets mis-price idiosyncratic risk. There may be some measurement problems with idiosyncratic risk that could be related to nondiversifiable risk.

Suggested Citation

Jiang, Xiaoquan and Lee, Bong-Soo, The Dynamic Relation between Returns and Idiosyncratic Volatility. Financial Management, Vol. 35, No. 2, Summer 2006, Available at SSRN: https://ssrn.com/abstract=929704

Xiaoquan Jiang (Contact Author)

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Bong-Soo Lee

Korea Advanced Institute of Science and Technology (KAIST)

373-1 Kusong-dong
Yuson-gu
Taejon 305-701, 130-722
Korea, Republic of (South Korea)

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
16
Abstract Views
1,369
PlumX Metrics