Idiosyncratic Volatility and Cross-Section of Stock Returns: Evidences from India

Sharma, Prashant; Kumar, Brajesh

doi:10.2139/ssrn.2494736

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“…An increase (decrease) in the VIX index is followed by a negative (positive) relationship between IV and future returns. Sharma and Kumar (2014) show that IV positively influences the cross-section of Indian stock returns. After adjusting for unexpected IV, the inter-temporal dependence between expected IV and expected returns is found to be positive.…”

Section: Literature Reviewmentioning

confidence: 90%

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

Chowdhury

2021

Investment Management and Financial Innovations

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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.

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Section: Literature Reviewmentioning

confidence: 90%

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

Chowdhury

2021

Investment Management and Financial Innovations

View full text Add to dashboard Cite

show abstract

Idiosyncratic Volatility and Cross-Section of Stock Returns: Evidences from India

Cited by 1 publication

References 0 publications

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

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

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