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EXPECTED VOLATILITY, UNEXPECTED VOLATILITY, AND THE CROSS‐SECTION OF STOCK RETURNS
Author(s) -
Chua Choong Tze,
Goh Jeremy,
Zhang Zhe
Publication year - 2010
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/j.1475-6803.2010.01264.x
Subject(s) - volatility (finance) , economics , volatility swap , volatility risk premium , forward volatility , volatility smile , econometrics , stock (firearms) , implied volatility , financial economics , systematic risk , mechanical engineering , engineering
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.