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The Dynamic Relation Between Returns and Idiosyncratic Volatility
Author(s) -
Jiang Xiaoquan,
Lee BongSoo
Publication year - 2006
Publication title -
financial management
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.647
H-Index - 68
eISSN - 1755-053X
pISSN - 0046-3892
DOI - 10.1111/j.1755-053x.2006.tb00141.x
Subject(s) - systematic risk , volatility (finance) , economics , econometrics , stock (firearms) , volatility risk , financial economics , implied volatility , volatility risk premium , mechanical engineering , engineering
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 robusrt 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. There may be some measurement problems with idiosyncratic risk that could be related to nondiversifiable risk.