Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-17T17:58:21.991Z Has data issue: false hasContentIssue false
  • English
  • Français

The Information Content of Idiosyncratic Volatility

Published online by Cambridge University Press:  01 February 2009

George J. Jiang ,
Danielle Xu  and
Tong Yao
George J. Jiang
Affiliation:
Eller College of Management, University of Arizona, PO Box 210108, Tucson, AZ 85721. [email protected]
Danielle Xu
Affiliation:
School of Business Administration, Gonzaga University, 502 E. Boone Ave., Spokane, WA 99258. [email protected]
Tong Yao
Affiliation:
Tippie College of Business, University of Iowa, 108 John Pappajohn Business Bldg., Iowa City, IA 52242. [email protected]
Get access Rights & Permissions [Opens in a new window]

Abstract

Ang, Hodrick, Xing, and Zhang (2006a) show that stocks with high idiosyncratic return volatility tend to have low future returns. This paper further documents that idiosyncratic volatility is inversely related to future earning shocks, and more importantly, that the return-predictive power of idiosyncratic volatility is induced by its information content about future earnings. We examine various explanations of the triangular relation among idiosyncratic volatility, future earning shocks, and future stock returns. Our results show that the idiosyncratic volatility anomaly is not a simple manifestation of previously documented market anomalies related to excessive extrapolation on firm growth, over-investment tendency, accounting accruals, or investor underreaction to earnings news. On the other hand, there is evidence that the idiosyncratic volatility anomaly is related to corporate selective disclosure, and the anomaly is stronger among stocks with a less sophisticated investor base.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 44 , Issue 1 , February 2009 , pp. 1 - 28
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2009

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Ang, A.; Hodrick, R.; Xing, Y.; and Zhang, X.. “The Cross-Section of Volatility and Expected Returns.” Journal of Finance, 61 (2006a), 259–299.CrossRefGoogle Scholar
Ang, A.; Hodrick, R.; Xing, Y.; and Zhang, X.. “High Idiosyncratic Volatility and Low Returns: International and Further U.S. Evidence.” Working Paper, Columbia University and NBER (2006b).Google Scholar
Anilowski, C.; Feng, M.; and Skinner, D.. “Does Earnings Guidance Affect Market Returns? The Nature and Information Content of Aggregate Earnings Guidance.” Journal of Accounting and Economics, 44 (2007), 36–63.CrossRefGoogle Scholar
Asquith, P.; Pathak, P. A.; and Ritter, J. R.. “Short Interest, Institutional Ownership, and Stock Returns.” Journal of Financial Economics, 78 (2005), 243–276.CrossRefGoogle Scholar
Ball, R., and Brown, P.. “An Empirical Evaluation of Accounting Income Numbers.” Journal of Accounting Research, 6 (1968), 159–178.CrossRefGoogle Scholar
Barber, B., and Lyon, J.. “Detecting Abnormal Operating Performance.” Journal of Financial Economics, 41 (1996), 359–399.CrossRefGoogle Scholar
Bernard, V. L., and Thomas, J. K.. “Post-Earnings-Announcement Drift: Delayed Price Response or Risk Premium? ” Journal of Accounting Research, 27 (1989), 1–36.CrossRefGoogle Scholar
Bernard, V. L., and Thomas, J. K.. “Evidence That Stock Prices Do Not Fully Reflect: The Implications of Current Earnings for Future Earnings.” Journal of Accounting and Economics, 13 (1990), 305–340.CrossRefGoogle Scholar
Boehme, R.; Danielsen, B.; Kumar, P.; and Sorescu, S.. “Idiosyncratic Risk and the Cross-Section of Stock Returns: Merton (1987) Meets Miller (1977).” Working Paper, Wichita State University (2005).CrossRefGoogle Scholar
Brennan, M.; Jegadeesh, N.; and Swaminathan, B.. “Investment Analysis and the Adjustment of Stock Prices to Common Information.” Review of Financial Studies, 6 (1993), 799–824.CrossRefGoogle Scholar
Campbell, J.; Lettau, M.; Malkiel, B.; and Xu, Y.. “Have Individual Stocks Become More Volatile? An Empirical Exploration of Idiosyncratic Risk.” Journal of Finance, 56 (2001), 1–43.CrossRefGoogle Scholar
Carhart, M. “On Persistence in Mutual Fund Performance.” Journal of Finance, 52 (1997), 57–82.CrossRefGoogle Scholar
Chan, L.; Karceski, J.; and Lakonishok, J.. “The Level and Persistence of Growth Rates.” Journal of Finance, 58 (2003), 643–684.CrossRefGoogle Scholar
Chan, L.; Sougiannis, T.; and Lakonishok, J.. “The Stock Market Valuation of Research and Development Expenditures.” Journal of Finance, 56 (2001), 2431–2456.CrossRefGoogle Scholar
Constantinides, G. “Optimal Stock Trading with Personal Taxes: Implications for Prices and the Abnormal January Returns.” Journal of Financial Economics, 13 (1984), 65–89.CrossRefGoogle Scholar
D’Avolio, G. “The Market for Borrowing Stocks.” Journal of Financial Economics, 66 (2002), 271–306.CrossRefGoogle Scholar
Dye, R. “Proprietary and Nonproprietary Disclosures.” Journal of Business, 59 (1986), 331–366.CrossRefGoogle Scholar
Fama, E., and French, K.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Fishman, M., and Hagerty, K.. “Disclosure Decisions by Firms and the Competition for Firm Efficiency.” Journal of Finance, 44 (1989), 633–646.CrossRefGoogle Scholar
Fu, F. “Idiosyncratic Risk and Cross-Section of Expected Stock Returns.”Journal of Financial Economics, forthcoming (2009).CrossRefGoogle Scholar
He, H., and Wang, J.. “Differential Information and Dynamic Behavior of Stock Trading Volume.” Review of Financial Studies, 8 (1995), 919–972.Google Scholar
Hong, H.; Lim, T.; and Stein, J.. “Bad News Travels Slowly: Size, Analyst Coverage, and the Profitability of Momentum Strategies.” Journal of Finance, 55 (2000), 265–295.CrossRefGoogle Scholar
Hutton, A.; Miller, G.; and Skinner, D.. “The Role of Supplementary Statements with Management Earnings Forecasts.” Journal of Accounting Research, 41(2003), 867–890.Google Scholar
Johnson, T. “Forecast Dispersion and the Cross-Section of Expected Returns.” Journal of Finance, 59 (2004), 1957–1978.CrossRefGoogle Scholar
Kothari, S. P.; Shu, S.; and Wysocki, P.. “Do Managers Withhold Bad News?” Journal of Accounting Research, forthcoming (2009).CrossRefGoogle Scholar
La Porta, R. “Expectations and the Cross-Section of Stock Returns.” Journal of Finance, 51 (1996), 1715–1742.Google Scholar
Lakonishok, J.; Shleifer, A.; and Vishny, R.. “Contrarian Investment, Extrapolation and Risk.” Journal of Finance, 49 (1994), 1541–1578.CrossRefGoogle Scholar
Lang, M.; and Lundholm, R.. “Cross-Sectional Determinants of Analyst Ratings of Corporate Disclosures.” Journal of Accounting Research, 31 (1993), 246–271.CrossRefGoogle Scholar
Lang, M., and Lundholm, R.. “Corporate Disclosure Policy and Analyst Behavior.” Accounting Review, 71 (1996), 467–492.Google Scholar
Merton, R. “A Simple Model of Capital Market Equilibrium with Incomplete Information.” Journal of Finance, 42 (1987), 483–510.Google Scholar
Miller, E. “Risk, Uncertainty, and Divergence of Opinion.” Journal of Finance, 32 (1977), 1151–1168.CrossRefGoogle Scholar
Nagel, S. “Short Sales, Institutional Investors and the Cross-Section of Stock Returns.” Journal of Financial Economics, 78 (2005), 277–309.Google Scholar
Newey, W., and West, K.. “A Simple Positive Semi-Definite, Heteroscedasticity and Autocorrelation Consistent Covariance Matrix.” Econometrica, 55 (1987), 703–708.Google Scholar
Pastor, L., and Stambaugh, R.. “Liquidity Risk and Expected Stock Returns.” Journal of Political Economy, 111 (2003), 642–685.CrossRefGoogle Scholar
Richardson, S.; Teoh, S. H.; and Wysocki, P.. “The Walk-Down to Beatable Analyst Forecasts: The Role of Equity Issuance and Inside Trading Incentives.” Contemporary Accounting Research, 21 (2004), 885–924.Google Scholar
Shin, H. “Disclosures and Asset Returns.” Econometrica, 71 (2003), 105–133.CrossRefGoogle Scholar
Shumway, T. “The Delisting Bias in CRSP Data.” Journal of Finance, 52 (1997), 327–340.Google Scholar
Sloan, R. “Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings.” The Accounting Review, 71 (1996), 289–315.Google Scholar
Titman, S.; Wei, J.; and Xie, F.. “Capital Investment and Stock Returns.” Journal of Financial and Quantitative Analysis, 39 (2004), 677–700.Google Scholar
Verrecchia, R. “Discretionary Disclosure.” Journal of Accounting and Economics, 5 (1983), 179–194.CrossRefGoogle Scholar
Xu, Y., and Malkiel, B.. “Investigating the Behavior of Idiosyncratic Volatility.” Journal of Business, 76 (2003), 613–644.CrossRefGoogle Scholar
Yu, F. “Accounting Transparency and the Term Structure of Credit Spreads.” Journal of Financial Economics, 75 (2005), 53–84.Google Scholar