Are idiosyncratic volatility and MAX priced in the Canadian market? |
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| Institution: | 1. The Smeal College of Business, The Pennsylvania State University, 322 Business Building, University Park, State College, 16801, Pennsylvania, USA;2. Department of Finance, John Molson School of Business, Concordia University, 1455 de Maisonneuve Blvd. West, Montreal, P.Q., H3G 1M8, Canada;1. Utah State University, Jon M. Huntsman School of Business, Department of Economics and Finance, 3565 Old Main Hill, Logan, UT, 84322-3565, USA;2. University of Cincinnati, Lindner College of Business, Department of Finance, Real Estate, and Insurance and Risk Management, PO Box 210195, Cincinnati, OH, 45221, USA;3. Miami University, Farmer School of Business, Department of Finance, 800 E. High St, Oxford, OH, 45056, USA;4. West Virginia University, John Chambers College of Business and Economics, Department of Finance, 1501 University Ave., Morgantown, WV, 26506 USA |
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| Abstract: | The negative relationship between realized idiosyncratic volatility (RIvol) and future returns uncovered by Ang et al. (2006) for the U.S. market has been attributed to return reversals. For the Canadian market where return reversals are considerably less important, we find that RIvol is positively related to future returns, even after controlling for risk loadings, illiquidity and reversals. Unlike the findings of Bali et al. (2001) for the U.S. market, we find that the relationship between extreme positive returns (MAX) and future returns for the Canadian market is positive and that idiosyncratic volatility continues to be consistently positively related to future returns after controlling for MAX. We find evidence that suggests that reversals for stocks with extreme daily returns are confined to (typically small) stocks with low institutional holdings. |
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