A Multi-Factor Model of Idiosyncratic Volatility

2019 ◽  
Author(s):  
Thijs van der Heijden ◽  
Qi Zeng ◽  
Yichao Zhu
Keyword(s):  
Factor Model ◽  
Idiosyncratic Volatility

scholarly journals Is idiosyncratic risk ignored in asset pricing: Sri Lankan evidence?

2019 ◽  
Vol 5 (1) ◽  
Author(s):  
Moinak Maiti
Keyword(s):  
Factor Model ◽  
Stock Exchange ◽  
Investment Decision ◽  
Idiosyncratic Risk ◽  
Idiosyncratic Volatility ◽  
Sri Lankan ◽  
Cross Sectional ◽  
Volatility Risk ◽  
And Performance ◽  
Three Factor

AbstractThe present study focused on one of the important South Asian nations—Sri Lanka—to examine the role of idiosyncratic volatility in asset prices. A four-factor model with idiosyncratic volatility was designed for capturing the market, size, value and idiosyncratic risk yields better than Fama and French’s (J Financ Econ 33:3–56, 1993) three-factor model and performance of the model. Fama–MacBeth’s cross-sectional regression, residual graphs and GRS test all confirm the superiority of four-factor model over 2 three-factor models. For all MC- and IVOL-based portfolios, idiosyncratic volatility is negatively related to the expected returns and positively related for all PB-based portfolios. Finally, study findings confirm that there is a high importance for idiosyncratic volatility risk factor while considering investment decision in Colombo stock exchange. Hence, investor should compensate for holding such risk factors in the portfolio.

Heterogeneous beliefs and idiosyncratic volatility puzzle: evidence from China

2020 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Mao He ◽  
Juncheng Huang ◽  
Hongquan Zhu
Keyword(s):  
Stock Returns ◽  
Trading Volume ◽  
Factor Model ◽  
Heterogeneous Beliefs ◽  
Idiosyncratic Volatility ◽  
Chinese Stock Market ◽  
Content Type ◽  
Volatility Puzzle ◽  
The Relationship ◽  
Idiosyncratic Volatility Puzzle

PurposeThe purpose of our study is to explore the “idiosyncratic volatility puzzle” in Chinese stock market from the perspective of investors' heterogeneous beliefs. To delve into the relationship between idiosyncratic volatility and investors' heterogeneous beliefs, and uncover the ability of heterogeneous beliefs, as well as to explain the “idiosyncratic volatility puzzle”, we construct our study as follows.Design/methodology/approachOur study adopts the unexpected trading volume as proxies of heterogeneity, the residual of Fama–French three-factor model as proxies of idiosyncratic volatility. Portfolio strategies and Fama–MacBeth regression are used to investigate the relationship between the two proxies and stock returns in Chinese A-share market.FindingsInvestors' heterogeneous beliefs, as an intermediary variable, are positively correlated with idiosyncratic volatility. Meanwhile, it could better demonstrate the negative correlation between the idiosyncratic volatility and future stock returns. It is one of the economic mechanisms linking idiosyncratic volatility to subsequent stock returns, which can account for 11.28% of the puzzle.Originality/valueThe findings indicate that idiosyncratic volatility is significantly and positively correlated with heterogeneous beliefs and that heterogeneous beliefs are effective intervening variables to explain the “idiosyncratic volatility puzzle”.

On ethnicity of idiosyncratic risk and stock returns puzzle

Humanomics ◽  
2016 ◽  
Vol 32 (1) ◽  
pp. 48-68 ◽  
Author(s):  
Naseem Al Rahahleh ◽  
Iman Adeinat ◽  
Ishaq Bhatti
Keyword(s):  
Stock Returns ◽  
Financial Crises ◽  
Factor Model ◽  
Idiosyncratic Risk ◽  
Idiosyncratic Volatility ◽  
Content Type ◽  
Country Level ◽  
Expected Stock Returns ◽  
The Relationship ◽  
Three Factor

Purpose – The purpose of this paper is to understand the controversial issue of whether stock returns and idiosyncratic risks are related positively or negatively in case of Singaporean ethically poor screened stocks. Design/methodology/approach – To achieve the major objectives of this paper, it uses a multiple regression to explore the relationship between expected stock returns and idiosyncratic risk. The paper replicates the Lee and Faff’s (2009) three-factor capital asset-pricing model (CAPM) model in creating the six size/book-to-market portfolios from which it constructs the small minus big (SMB) and high minus low (HML) portfolios that capture the size and book-to-market equity factors, respectively. Findings – The basic finding of the paper is that there is a strong relation between idiosyncratic risk and the expected stock returns. In more details, we observe that the portfolio of stocks with the highest idiosyncratic volatility generates higher average returns (4.36 per cent) than the portfolio of stocks with the lowest idiosyncratic volatility (0.79 per cent) over the sample period. The paper observes that the stock’s idiosyncratic volatility is inversely correlated with the size of the underlying firm. Moreover, there is a pattern of relationships nearer the periods of financial crises: Asian and global financial crises. Research limitations/implications – This paper uses only a three-factor model on a single country. So it cannot be generalized to a multi-country level in the Association of Southeast Asian Nations (ASEAN) region, as the structure of each member country is different. Practical implications – This paper provides guidelines for policymakers and foreign investors in Singapore about the relationship. This research can also be extended to other ASEAN countries to understand this puzzle. Social implications – Ethically sensitive and faithful investors with small investment can benefit from the findings of this paper. Originality/value – The work reported in this paper is original, unpublished and is also not under consideration for publication elsewhere.

Asset Pricing with Status Risk

2011 ◽  
Vol 01 (03) ◽  
pp. 495-549 ◽  
Author(s):  
Yoel Krasny
Keyword(s):  
Factor Model ◽  
Empirical Literature ◽  
Idiosyncratic Volatility ◽  
High Status ◽  
Portfolio Choices ◽  
Status Seeking ◽  
The Status ◽  
High Volatility ◽  
The Impact ◽  
Significant Support

This paper examines the impact of status-seeking considerations on investors' portfolio choices and asset prices in a general equilibrium setting. The economy studied in this paper consists of traditional ("Markowitz") investors as well as status-seekers who are concerned about relative wealth. The model highlights the strategic and interdependent nature of portfolio selection in such a setting: Low-status investors look for portfolio choices that maximize their chances of moving up the ladder while high-status investors look to maintain the status quo and hedge against these choices of the low-status investors. In equilibrium, asset returns obey a novel two-factor model in which one factor is the traditional market factor and the other is a particular "high volatility factor" that does not appear to have been identified so far in the theoretical or empirical literature. This two-factor model found significant support when tested with stock market data. Of particular interest is that the model and the empirical results attribute the low returns on idiosyncratic volatility stocks to their covariance with the portfolio of highly volatile stocks held by investors with relatively low status.

scholarly journals Firm-specific News and Anomalies

2020 ◽  
Author(s):  
Hoang Van Hai ◽  
Phan Kim Tuan ◽  
Le The Phiet
Keyword(s):  
Factor Model ◽  
Idiosyncratic Volatility ◽  
Fresh Sample ◽  
Cross Sectional ◽  
Out Of Sample ◽  
Market Beta ◽  
Limited Arbitrage ◽  
Sample Test ◽  
Fama And French ◽  
Macro Finance

This study investigates the relation between idiosyncratic volatility and future returns around the firm-specific news announcements in the Korean stock market from July 1995 to June 2018. The excess returns of decile portfolios that are formed by sorting the stocks based on news and non-news idiosyncratic volatility measures. The Fama and French three-factor model is also examined to see whether systematic risk affects news and non-news idiosyncratic volatility profits. The pricing of our news and non-news idiosyncratic volatility are confirmed in the cross-sectional regression using the Fama and MacBeth method. Market beta, size, book to market, momentum, liquidity, and maximum return are controlled to determine robustness. Our empirical evidence suggests that the pricing of the non-news idiosyncratic volatility is more strongly negative compared to the news idiosyncratic volatility, which is contrary to the limited arbitrage explanation for the negative price of the idiosyncratic volatility. We find that the non-news idiosyncratic volatility has a robust negative relation to returns in non-January months. Macro-finance factors drive the conditioned on the missing risk factor hypothesis, the pricing of idiosyncratic volatility. This study contributes to a better understanding of the role of the conditional idiosyncratic volatility in asset pricing. As the Korean stocks provide a fresh sample, our non-U.S. investigation delivers a useful out-of-sample test on the pervasiveness of the non-news volatility effect across the emerging markets.

scholarly journals Alpha Beta Risk and Stock Returns—A Decomposition Analysis of Idiosyncratic Volatility with Conditional Models

Risks ◽  
2018 ◽  
Vol 6 (4) ◽  
pp. 124 ◽  
Author(s):  
Chengbo Fu
Keyword(s):  
Stock Returns ◽  
Factor Model ◽  
Decomposition Analysis ◽  
Return Predictability ◽  
Idiosyncratic Volatility ◽  
Time Varying ◽  
Additional Risk ◽  
Unconditional Model ◽  
Conditional Models ◽  
Beta Risk

The variance of stock returns is decomposed based on a conditional Fama–French three-factor model instead of its unconditional counterpart. Using time-varying alpha and betas in this model, it is evident that four additional risk terms must be considered. They include the variance of alpha, the variance of the interaction between the time-varying component of beta and factors, and two covariance terms. These additional risk terms are components that are included in the idiosyncratic risk estimate using an unconditional model. By investigating the relation between the risk terms and stock returns, we find that only the variance of the time-varying alpha is negatively associated with stock returns. Further tests show that stock returns are not affected by the variance of time-varying beta. These results are consistent with the findings in the literature identifying return predictability from time-varying alpha rather than betas.

scholarly journals Idiosyncratic volatility, investor sentiment, and returns of the GCC stock markets

2021 ◽  
Vol 18 (4) ◽  
pp. 190-202
Author(s):  
Shah Saeed Hassan Chowdhury
Keyword(s):  
Stock Returns ◽  
Stock Prices ◽  
Stock Markets ◽  
Factor Model ◽  
Investor Sentiment ◽  
Principal Component ◽  
Ordinary Least Squares ◽  
Idiosyncratic Volatility ◽  
Market Sentiment ◽  
Finance Theory

Standard finance theory suggests that idiosyncratic volatility should not influence stock returns. In reality, if investors are unable to achieve efficient diversification, such risk may affect stock returns. The purpose of the study is to examine the presence of idiosyncratic volatility and sentiment in the stock markets of the GCC (Gulf Cooperation Council) countries. Monthly idiosyncratic volatility is estimated using the Fama-French three-factor model. A unified sentiment proxy for each market is created by employing Principal Component Analysis (PCA). Then, Ordinary Least Squares (OLS) regressions are applied. F-statistics, t-statistics, and adjusted R2s are used to test the presence of idiosyncratic volatility and sentiment in the GCC markets.Findings show that the effect of sentiment on stock returns is observed across all the GCC markets. Investor sentiment can weakly explain the effect of idiosyncratic volatility on stock returns. In general, investors do not price expected idiosyncratic volatility, and only the unexpected part of it affects stock returns. Overall, the first implication for investors is that they must consider market sentiment to predict the cross-section of stock prices and should not completely ignore the influence of idiosyncratic volatility on stocks. Secondly, the implication for policymakers is that they should motivate companies to go public so that investors have more options to diversify their portfolios across different sectors.

scholarly journals Uji Empiris Pengaruh Idiosyncratic Volatility Terhadap Expected Return: Aplikasi Fama-French Five Factor Model

2019 ◽  
Vol 9 (2) ◽  
pp. 268
Author(s):  
Muhammad Pudjianto ◽  
Buddi Wibowo
Keyword(s):  
Asset Pricing ◽  
Factor Model ◽  
Direct Method ◽  
Five Factor Model ◽  
Idiosyncratic Volatility ◽  
Expected Return ◽  
Cross Sectional ◽  
Ex Ante

Penelitian ini bertujuan untuk melakukan pengujian pengaruh antara idiosyncratic volatility dengan expected return. Idiosyncratic volatility dihitung dengan pendekatan langsung (direct method), yaitu standar deviasi dari residual yang dihasilkan model asset pricing Fama-French Five Factor. Penelitian ini menguji idiosyncratic volatility secara contemporaneous dan ex-ante. One-month lagged idiosyncratic volatility digunakan sebagai proksi dari expected idiosyncratic volatility. Metode yang digunakan dalam menguji model penelitian adalah Fama-Macbeth Cross-Sectional Regression. Hasil penelitian menunjukkan bahwa terdapat pengaruh yang positif dan signifikan antara realized idiosyncratic volatility dengan expected return pada waktu yang bersamaan (contemporaneous). Sedangkan secara ex-ante terdapat pengaruh yang negatif dan signifikan antara one-month lagged idiosyncratic volatility dengan expected return.

Psychometrical Properties of a French Version of the General Self-Efficacy Short Scale (ASKU)

2020 ◽  
Vol 79 (1) ◽  
pp. 15-25
Author(s):  
Jean Philippe Décieux ◽  
Philipp Emanuel Sischka ◽  
Anette Schumacher ◽  
Helmut Willems
Keyword(s):  
Self Efficacy ◽  
Factor Model ◽  
German Version ◽  
French Version ◽  
Context Variable ◽  
Confirmatory Factor ◽  
French Speaking ◽  
German Speaking ◽  
Valid Instrument ◽  
General Self Efficacy

Abstract. General self-efficacy is a central personality trait often evaluated in surveys as context variable. It can be interpreted as a personal coping resource reflecting individual belief in one’s overall competence to perform across a variety of situations. The German-language Allgemeine-Selbstwirksamkeit-Kurzskala (ASKU) is a reliable and valid instrument to assess this disposition in the German-speaking countries based on a three-item equation. This study develops a French version of the ASKU and tests this French version for measurement invariance compared to the original ASKU. A reliable and valid French instrument would make it easy to collect data in the French-speaking countries and allow comparisons between the French and German results. Data were collected on a sample of 1,716 adolescents. Confirmatory factor analysis resulted in a good fit for a single-factor model of the data (in total, French, and German version). Additionally, construct validity was assessed by elucidating intercorrelations between the ASKU and different factors that should theoretically be related to ASKU. Furthermore, we confirmed configural and metric as well as scalar invariance between the different language versions, meaning that all forms of statistical comparison between the developed French version and the original German version are allowed.

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