Idiosyncratic Volatility Puzzle: Influence of Macro-Finance Factors

Identifier:  PC:2268

Handle: https://hdl.handle.net/20.500.11797/PC2268

Authors:  Savva, Christos S.; Lambertides, Neophytos; Christiansen, Charlotte; Aslanidis, Nektarios

Abstract:
In this paper, we scrutinize the cross-sectional relation between idiosyncratic volatility and stock returns. As a novelty, the idiosyncratic volatility is obtained by conditioning upon macro-finance factors as well as upon traditional asset pricing factors. The macro-finance factors are constructed from a large pool of macroeconomic and financial variables. Cleaning for macro-finance e§ects reverses the puzzling negative relation between returns and idiosyncratic volatility documented previously. Portfolio analysis shows that the effects from macro-finance factors are economically strong. The relation between idiosyncratic volatility and returns does not vary with the NBER business cycles. The empirical results are highly robust. Keywords: Idiosyncratic volatility puzzle; Macro-finance predictors; Factor analysis; Business cycle. JEL Classifications: G12; G14