Idiosyncratic volatility and equity returns: UK evidence |
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Authors: | Timotheos Angelidis Nikolaos Tessaromatis |
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Institution: | a Department of Economics, University of Crete, Gallos Campus, 74100 Rethymno, Greece b Athens Laboratory of Business Administration, Athinas Ave. and 2a Areos street, Vouliagmeni GR-166 71, Greece |
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Abstract: | The proposition that idiosyncratic volatility may matter in asset pricing is currently a topic of research and controversy. Using data from the UK market we examine the predictive ability of various measures of idiosyncratic risk and provide evidence which suggests that: (a) it is the idiosyncratic volatility of small capitalization stocks that matters for asset pricing and (b) that small stocks idiosyncratic volatility predicts the small capitalization premium component of market returns and is unrelated to either the market or the value premium. The predictive power of the aggregate idiosyncratic volatility of small stocks remains intact even after we control for the possible proxying effects of business cycle fluctuations and liquidity and is robust across time and different econometric specifications. |
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Keywords: | G10 G11 C13 |
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