Working Paper: NBER ID: w13739
Authors: Andrew Ang; Robert J. Hodrick; Yuhang Xing; Xiaoyan Zhang
Abstract: Stocks with recent past high idiosyncratic volatility have low future average returns around the world. Across 23 developed markets, the difference in average returns between the extreme quintile portfolios sorted on idiosyncratic volatility is -1.31% per month, after controlling for world market, size, and value factors. The effect is individually significant in each G7 country. In the U.S., we rule out explanations based on trading frictions, information dissemination, and higher moments. There is strong comovement in the low returns to high idiosyncratic volatility stocks across countries, suggesting that broad, not easily diversifiable, factors may lie behind this phenomenon.
Keywords: Idiosyncratic Volatility; Expected Returns; Asset Pricing
JEL Codes: F3; G12; G15
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| high lagged idiosyncratic volatility (C58) | low future average returns (G17) |
| low future average returns (G17) | high lagged idiosyncratic volatility (C58) |
| high idiosyncratic volatility (G19) | lower expected returns (G12) |
| idiosyncratic volatility effect persists (G40) | lower expected returns (G12) |
| high idiosyncratic volatility stocks comovement (G19) | lower expected returns (G12) |