Return Reversals, Idiosyncratic Risk, and Expected Returns
Author | : Wei Huang |
Publisher | : |
Total Pages | : 37 |
Release | : 2009 |
ISBN-10 | : OCLC:1290843642 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Return Reversals, Idiosyncratic Risk, and Expected Returns written by Wei Huang and published by . This book was released on 2009 with total page 37 pages. Available in PDF, EPUB and Kindle. Book excerpt: The empirical evidence on the cross-sectional relation between idiosyncratic risk and expected stock returns is mixed. We demonstrate that the omission of the previous month's stock returns can lead to a negatively biased estimate of the relation. The magnitude of the omitted variable bias depends on the approach to estimating the conditional idiosyncratic volatility. Although a negative relation exists when the estimate is based on daily returns, it disappears after return reversals are controlled for. Return reversals can explain both the negative relation between value-weighted portfolio returns and idiosyncratic volatility and the insignificant relation between equal-weighted portfolio returns and idiosyncratic volatility. In contrast, there is a significantly positive relation between the conditional idiosyncratic volatility estimated from monthly data and expected returns. This relation remains robust after controlling for return reversals.