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Author: David A. Lesmond
Publisher:
ISBN:
Category :
Languages : en
Pages : 45
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Book Description
We examine the cross-sectional relation between idiosyncratic volatility (IV) and stock returns and find the results of AngHodrickXingZhang (2006) are critically dependent on the occurrence of zero returns that reflects an inflated measurement of IV. Specifically controlling for liquidity costs engendered in both the percentage of zero returns and the more direct bid-ask spread removes the ability of IV to predict future returns, contrary to SpiegelWang (2005) and Ang et al. (2006). Examining external shocks to liquidity due to reductions in the stated quotes after 1997 and 2001, shows a reduction in the occurrence of zero returns that is accompanied by a significant reduction in the pricing ability of IV. Restricting our analysis to those firms that experience less than 5 % zero returns during the period 1983 to 1996, when the overall pricing ability of IV is at a peak, shows no ability of IV to predict returns. The percentage of zero returns and its affect on IV measurement appears to be a missing component in the ongoing analysis of the pricing of IV.
Author: David A. Lesmond
Publisher:
ISBN:
Category :
Languages : en
Pages : 45
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Book Description
We examine the cross-sectional relation between idiosyncratic volatility (IV) and stock returns and find the results of AngHodrickXingZhang (2006) are critically dependent on the occurrence of zero returns that reflects an inflated measurement of IV. Specifically controlling for liquidity costs engendered in both the percentage of zero returns and the more direct bid-ask spread removes the ability of IV to predict future returns, contrary to SpiegelWang (2005) and Ang et al. (2006). Examining external shocks to liquidity due to reductions in the stated quotes after 1997 and 2001, shows a reduction in the occurrence of zero returns that is accompanied by a significant reduction in the pricing ability of IV. Restricting our analysis to those firms that experience less than 5 % zero returns during the period 1983 to 1996, when the overall pricing ability of IV is at a peak, shows no ability of IV to predict returns. The percentage of zero returns and its affect on IV measurement appears to be a missing component in the ongoing analysis of the pricing of IV.
Author: Madhu Kalimipalli
Publisher:
ISBN:
Category :
Languages : en
Pages : 53
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Book Description
Our main objective in this paper is to determine empirically the extent to which fixed-income investors are concerned about equity volatility and bond liquidity in corporate bond spreads. We extend Campbell and Taksler (2003) by conditioning for underlying bond liquidity, and exploring the relative contribution of idiosyncratic equity volatility and bond liquidity in the cross-sectional pricing of corporate bond spreads. Portfolio analysis and Fama-Macbeth regressions reveal that while both volatility and liquidity effects are significant, volatility (representing ex-ante credit shock) has the first-order impact, and liquidity (represented by bond characteristics and price impact measure) has the secondary impact on bond spreads. Conditional analysis further reveals that distressed bonds and distress regimes are both associated with significantly higher impact of credit and liquidity shocks. However, the relative impact of these shocks varies. Volatility effects are more prominent for distressed bonds and during high-distress regimes; liquidity effects are stronger for less distressed bonds and during low-distress regimes. Our findings also indicate that, unlike equity markets, idiosyncratic risk does not subsume the information in liquidity in explaining corporate bond spreads.
Author: Yufeng Han
Publisher:
ISBN:
Category :
Languages : en
Pages : 46
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Book Description
This paper examines data from 45 world markets and shows that the previously documented relation between mean returns and idiosyncratic volatility arises because of biases in volatility estimates that we can attribute to the bid-ask bounce in trade prices. We show that no significant relation exists between mean returns and idiosyncratic volatility estimated from quote-midpoint returns. Further, there is no significant relation between mean returns and the portion of transaction-price based idiosyncratic volatility that is orthogonal to bid-ask spreads. The pricing of idiosyncratic volatility is due to the negative pricing of the bid-ask spread.
Author: Turan G. Bali
Publisher:
ISBN:
Category :
Languages : en
Pages : 29
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Book Description
This paper examines the cross-sectional relation between idiosyncratic volatility and expected stock returns. The results indicate that (i) data frequency used to estimate idiosyncratic volatility, (ii) weighting scheme used to compute average portfolio returns, (iii) breakpoints utilized to sort stocks into quintile portfolios, and (iv) using a screen for size, price and liquidity play a critical role in determining the existence and significance of a relation between idiosyncratic risk and the cross-section of expected returns. Portfolio-level analyses based on two different measures of idiosyncratic volatility (estimated using daily and monthly data), three weighting schemes (value-weighted, equal-weighted, inverse-volatility-weighted), three breakpoints (CRSP, NYSE, equal-market-share), and two different samples (NYSE/AMEX/NASDAQ and NYSE) indicate that there is no robust, significant relation between idiosyncratic volatility and expected returns.
Author: Kiseok Nam
Publisher:
ISBN:
Category :
Languages : en
Pages : 48
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Book Description
We suggest that price interaction among stocks is an important determinant of idiosyncratic volatility. We demonstrate that as more (less) stocks are listed in the markets, price interaction among stocks increases (decreases), and hence stocks, on average, become more (less) volatile. Our results show that price interaction has a significant positive effect of idiosyncratic volatility. The results of various robustness checks indicate that the effect of price interaction is still significant to the presence of liquidity, newly listed firms, cash flow variables, business cycle variables, and market volatility. Once the price interaction effect is taken into account, no trend remains in idiosyncratic volatility. We conclude that there is no trend, but a reflection of the positive effect of price interaction on idiosyncratic volatility.
Author: Namho Kang
Publisher:
ISBN:
Category : Stocks
Languages : en
Pages : 0
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Book Description
This paper uncovers the changes in the cross-sectional distribution of idiosyncratic volatility of stocks over the period 1963--2008. The contribution of the top decile to the total market idiosyncratic volatility increased, while the contribution of the bottom decile decreased. We introduce a simple theoretical model showing that larger capital of Long/Short-Equity funds further exacerbates large idiosyncratic shocks but attenuates small idiosyncratic shocks. This effect is stronger for more illiquid stocks. Time-series and cross-sectional results are consistent with the predictions of the model. The results are robust to industry affiliation, stock liquidity, firm size, firm leverage, as well as sign of price change. These findings highlight the roll of hedge funds and other institutional investors in explaining the dynamics of extreme realizations in the cross-section of returns.
Author: Anas Aboulamer
Publisher:
ISBN:
Category :
Languages : en
Pages : 157
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Book Description
This thesis consists of three essays. The first essay (chapter two) examines the relationship between idiosyncratic volatility and future returns in the Canadian market. The negative relationship between realized idiosyncratic volatility (RIvol) and future returns uncovered by Ang et al. (2006) for the US market has been attributed to return reversals. For the Canadian market where return reversals have considerably less importance, 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. (2011) for the US market, we find for the Canadian market that the relationship between extreme positive returns and future returns is positive and that idiosyncratic volatility is consistently positively related to future returns. The second essay (chapter three) discusses the relationship between closed end fund discounts and the level of uncertainty about its holdings. Our trade-off model states that the intrinsic premium of a closed-end fund (CEF) is equal to the CEF’s price minus both its NAVPS (net asset value per share) and the net present value (NPV) of its future benefits from liquidity, managerial abilities and leverage minus its managerial costs. Any additional premium will persist to the extent that arbitrage between these two price series is both costly and risky. We find that arbitrage incompleteness due to the uncertainties about this NPV and the CEF’s holdings, as captured by idiosyncratic risk and other proxies, explains over two-thirds of the variation in CEF premiums or their changes. As expected, we find that the CEF premium is negatively related to gross leverage, management fees, cash and bond holdings, and positively related to liquidity enhancement, CEF performance and net leverage. These results are consistent with our finding that changes in CEF prices and NAVPS are more integrated than segmented using the Kappa test of Kapadia and Pu (2012). The third essay (chapter four) investigates the information content of idiosyncratic volatility around the public release of M&A rumors. We examine the releases of hand-collected initial rumors about potential M&A for 2250 firms. Unlike previous research, we find that a strategy of investing in firms with rumors of lower (greater) credibility yields negative (positive) changes in idiosyncratic volatilities around the rumor dates and subsequent returns. We argue that this asymmetric effect on idiosyncratic volatilities is linked to asymmetric changes in the heterogeneity of the probabilities of actual M&A when conditioned on rumor credibility. Changes in idiosyncratic volatilities are positively related to the market implicit probabilities of M&A as measured by the ratio of the market values at the M&A announcement and rumor dates.
Author: Ana-Maria Fuertes
Publisher:
ISBN:
Category :
Languages : en
Pages : 41
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Book Description
This article demonstrates that momentum, term structure and idiosyncratic volatility signals in commodity futures markets are not overlapping which inspires a novel triple-screen strategy. We show that simultaneously buying contracts with high past performance, high roll-yields and low idiosyncratic volatility, and shorting contracts with poor past performance, low roll-yields and high idiosyncratic volatility yields a Sharpe ratio over the 1985 to 2011 period which is five times that of the S&P-GSCI. The triple-screen strategy dominates the double-screen and individual strategies and this outcome cannot be attributed to overreaction, liquidity risk, transaction costs or the financialization of commodity futures markets.
Author: Turan G. Bali
Publisher: John Wiley & Sons
ISBN: 1118589475
Category : Business & Economics
Languages : en
Pages : 512
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Book Description
“Bali, Engle, and Murray have produced a highly accessible introduction to the techniques and evidence of modern empirical asset pricing. This book should be read and absorbed by every serious student of the field, academic and professional.” Eugene Fama, Robert R. McCormick Distinguished Service Professor of Finance, University of Chicago and 2013 Nobel Laureate in Economic Sciences “The empirical analysis of the cross-section of stock returns is a monumental achievement of half a century of finance research. Both the established facts and the methods used to discover them have subtle complexities that can mislead casual observers and novice researchers. Bali, Engle, and Murray’s clear and careful guide to these issues provides a firm foundation for future discoveries.” John Campbell, Morton L. and Carole S. Olshan Professor of Economics, Harvard University “Bali, Engle, and Murray provide clear and accessible descriptions of many of the most important empirical techniques and results in asset pricing.” Kenneth R. French, Roth Family Distinguished Professor of Finance, Tuck School of Business, Dartmouth College “This exciting new book presents a thorough review of what we know about the cross-section of stock returns. Given its comprehensive nature, systematic approach, and easy-to-understand language, the book is a valuable resource for any introductory PhD class in empirical asset pricing.” Lubos Pastor, Charles P. McQuaid Professor of Finance, University of Chicago Empirical Asset Pricing: The Cross Section of Stock Returns is a comprehensive overview of the most important findings of empirical asset pricing research. The book begins with thorough expositions of the most prevalent econometric techniques with in-depth discussions of the implementation and interpretation of results illustrated through detailed examples. The second half of the book applies these techniques to demonstrate the most salient patterns observed in stock returns. The phenomena documented form the basis for a range of investment strategies as well as the foundations of contemporary empirical asset pricing research. Empirical Asset Pricing: The Cross Section of Stock Returns also includes: Discussions on the driving forces behind the patterns observed in the stock market An extensive set of results that serve as a reference for practitioners and academics alike Numerous references to both contemporary and foundational research articles Empirical Asset Pricing: The Cross Section of Stock Returns is an ideal textbook for graduate-level courses in asset pricing and portfolio management. The book is also an indispensable reference for researchers and practitioners in finance and economics. Turan G. Bali, PhD, is the Robert Parker Chair Professor of Finance in the McDonough School of Business at Georgetown University. The recipient of the 2014 Jack Treynor prize, he is the coauthor of Mathematical Methods for Finance: Tools for Asset and Risk Management, also published by Wiley. Robert F. Engle, PhD, is the Michael Armellino Professor of Finance in the Stern School of Business at New York University. He is the 2003 Nobel Laureate in Economic Sciences, Director of the New York University Stern Volatility Institute, and co-founding President of the Society for Financial Econometrics. Scott Murray, PhD, is an Assistant Professor in the Department of Finance in the J. Mack Robinson College of Business at Georgia State University. He is the recipient of the 2014 Jack Treynor prize.
Author: Yakov Amihud
Publisher: Now Publishers Inc
ISBN: 1933019123
Category : Business & Economics
Languages : en
Pages : 109
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Book Description
Liquidity and Asset Prices reviews the literature that studies the relationship between liquidity and asset prices. The authors review the theoretical literature that predicts how liquidity affects a security's required return and discuss the empirical connection between the two. Liquidity and Asset Prices surveys the theory of liquidity-based asset pricing followed by the empirical evidence. The theory section proceeds from basic models with exogenous holding periods to those that incorporate additional elements of risk and endogenous holding periods. The empirical section reviews the evidence on the liquidity premium for stocks, bonds, and other financial assets.
