Does idiosyncratic volatility proxy for risk exposure?
We decompose aggregate market variance into an average correlation component and an average variance component. Only the latter commands a negative price of risk in the cross section of portfolios sorted by idiosyncratic volatility. Portfolios with high (low) idiosyncratic volatility relative to the...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Journal Article |
| Language: | English |
| Published: |
2013
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| Online Access: | https://hdl.handle.net/10356/98065 http://hdl.handle.net/10220/12190 |
| _version_ | 1826118776621367296 |
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| author | Petkova, Ralitsa Chen, Zhanhui |
| author2 | Nanyang Business School |
| author_facet | Nanyang Business School Petkova, Ralitsa Chen, Zhanhui |
| author_sort | Petkova, Ralitsa |
| collection | NTU |
| description | We decompose aggregate market variance into an average correlation component and an average variance component. Only the latter commands a negative price of risk in the cross section of portfolios sorted by idiosyncratic volatility. Portfolios with high (low) idiosyncratic volatility relative to the Fama-French (1993) model have positive (negative) exposures to innovations in average stock variance and therefore lower (higher) expected returns. These two findings explain the idiosyncratic volatility puzzle of Ang et al. (2006, 2009). The factor related to innovations in average variance also reduces the pricing errors of book-to-market and momentum portfolios relative to the Fama-French (1993) model. |
| first_indexed | 2024-10-01T04:49:01Z |
| format | Journal Article |
| id | ntu-10356/98065 |
| institution | Nanyang Technological University |
| language | English |
| last_indexed | 2024-10-01T04:49:01Z |
| publishDate | 2013 |
| record_format | dspace |
| spelling | ntu-10356/980652023-05-19T06:44:41Z Does idiosyncratic volatility proxy for risk exposure? Petkova, Ralitsa Chen, Zhanhui Nanyang Business School We decompose aggregate market variance into an average correlation component and an average variance component. Only the latter commands a negative price of risk in the cross section of portfolios sorted by idiosyncratic volatility. Portfolios with high (low) idiosyncratic volatility relative to the Fama-French (1993) model have positive (negative) exposures to innovations in average stock variance and therefore lower (higher) expected returns. These two findings explain the idiosyncratic volatility puzzle of Ang et al. (2006, 2009). The factor related to innovations in average variance also reduces the pricing errors of book-to-market and momentum portfolios relative to the Fama-French (1993) model. 2013-07-25T04:02:23Z 2019-12-06T19:50:13Z 2013-07-25T04:02:23Z 2019-12-06T19:50:13Z 2012 2012 Journal Article Chen, Z.,& Petkova, R. (2012). Does Idiosyncratic Volatility Proxy for Risk Exposure? Review of Financial Studies, 25(9), 2745-2787. https://hdl.handle.net/10356/98065 http://hdl.handle.net/10220/12190 10.1093/rfs/hhs084 en Review of Financial Studies © 2012 The Author. Published by Oxford University Press on behalf of The Society for Financial Studies. |
| spellingShingle | Petkova, Ralitsa Chen, Zhanhui Does idiosyncratic volatility proxy for risk exposure? |
| title | Does idiosyncratic volatility proxy for risk exposure? |
| title_full | Does idiosyncratic volatility proxy for risk exposure? |
| title_fullStr | Does idiosyncratic volatility proxy for risk exposure? |
| title_full_unstemmed | Does idiosyncratic volatility proxy for risk exposure? |
| title_short | Does idiosyncratic volatility proxy for risk exposure? |
| title_sort | does idiosyncratic volatility proxy for risk exposure |
| url | https://hdl.handle.net/10356/98065 http://hdl.handle.net/10220/12190 |
| work_keys_str_mv | AT petkovaralitsa doesidiosyncraticvolatilityproxyforriskexposure AT chenzhanhui doesidiosyncraticvolatilityproxyforriskexposure |