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Idiosyncratic Volatility, Its Expected Variation, and the Cross-Section of Stock Returns
| Content Provider | Semantic Scholar |
|---|---|
| Author | Branger, Nicole Hülsbusch, Hendrik Middelhoff, T. Frederik |
| Copyright Year | 2018 |
| Abstract | We show that the widely documented negative relation between idiosyncratic volatility (IVOL) and expected returns can be explained by the mean reversion of stocks' idiosyncratic volatilities. We use option-implied information to extract the mean reversion speed of IVOL in an almost model-free fashion. This allows us to identify stocks for which past IVOL is a bad proxy for expected IVOL. These stocks solely drive the negative relation, and a long--short portfolio earns a monthly risk-adjusted return of 2.74%, on average. In a horse race, the mean reversion speed is superior to prominent competing explanations of the IVOL puzzle. |
| File Format | PDF HTM / HTML |
| DOI | 10.2139/ssrn.2995069 |
| Alternate Webpage(s) | https://www.cfr-cologne.de/download/kolloquium/2017/MiddelhoffBrangerHulsbusch.pdf |
| Alternate Webpage(s) | https://www.eurofidai.org/sites/default/files/pdf/parismeeting/2018/MIDDELHOFF_2018.pdf |
| Alternate Webpage(s) | https://doi.org/10.2139/ssrn.2995069 |
| Language | English |
| Access Restriction | Open |
| Content Type | Text |
| Resource Type | Article |