The Relation Between Idiosyncratic Volatility and Returns for U.S. Mutual Funds
(2016) NEKP03 20152Department of Economics
- Abstract
- Theoretically the relation between returns and idiosyncratic volatility should be non-existent or positive. Many empirical studies confirm this but Ang, Hodrick, Xing and Zhang (2006) contest the conventional view and find a negative relationship for a sample of U.S. firms. I contribute to the field by investigating the relation for a sample of U.S. mutual funds. The sample consist of a total of 10 917 equity mutual funds, the funds are divided in to four different classes depending on equity focus (growth, value, small cap and large cap). Data were collected for the period 1995 to 2015. Ang et al. (2006) relate returns with lagged idiosyncratic volatility making the implicit assumption that idiosyncratic volatility can be described as a... (More)
- Theoretically the relation between returns and idiosyncratic volatility should be non-existent or positive. Many empirical studies confirm this but Ang, Hodrick, Xing and Zhang (2006) contest the conventional view and find a negative relationship for a sample of U.S. firms. I contribute to the field by investigating the relation for a sample of U.S. mutual funds. The sample consist of a total of 10 917 equity mutual funds, the funds are divided in to four different classes depending on equity focus (growth, value, small cap and large cap). Data were collected for the period 1995 to 2015. Ang et al. (2006) relate returns with lagged idiosyncratic volatility making the implicit assumption that idiosyncratic volatility can be described as a random walk. But as Fu (2009) I find that this is not true and use an AR(2) model to estimate idiosyncratic volatility, inspired by Chua, Choong Tze, Jeremy Goh, and Zhe Zhang (2010). The idiosyncratic volatility is estimated relative to the Carhart (1997) four- factor mode and divided in to an expected and unexpected part as in Chua et al. The relation is examined using Fama-MacBeth (1973) regressions with both gross return and the Carhart alpha as dependent variables. The results suggest a positive relation only when using the Carhart alpha as dependent variable and all the control variables. Otherwise the results are inconclusive. As an additional robustness test I perform portfolio sorting on EIV without control variables and get results that suggest a negative relation. (Less)
Please use this url to cite or link to this publication:
http://lup.lub.lu.se/student-papers/record/8522263
- author
- Skogström Lundgren, Kevin LU
- supervisor
- organization
- course
- NEKP03 20152
- year
- 2016
- type
- H2 - Master's Degree (Two Years)
- subject
- keywords
- Idiosyncratic volatility, Mutual funds, Carhart four-factor model, ARIMA model, Carhart four-factor alpha
- language
- English
- id
- 8522263
- date added to LUP
- 2016-02-11 14:38:39
- date last changed
- 2016-02-11 14:38:39
@misc{8522263, abstract = {{Theoretically the relation between returns and idiosyncratic volatility should be non-existent or positive. Many empirical studies confirm this but Ang, Hodrick, Xing and Zhang (2006) contest the conventional view and find a negative relationship for a sample of U.S. firms. I contribute to the field by investigating the relation for a sample of U.S. mutual funds. The sample consist of a total of 10 917 equity mutual funds, the funds are divided in to four different classes depending on equity focus (growth, value, small cap and large cap). Data were collected for the period 1995 to 2015. Ang et al. (2006) relate returns with lagged idiosyncratic volatility making the implicit assumption that idiosyncratic volatility can be described as a random walk. But as Fu (2009) I find that this is not true and use an AR(2) model to estimate idiosyncratic volatility, inspired by Chua, Choong Tze, Jeremy Goh, and Zhe Zhang (2010). The idiosyncratic volatility is estimated relative to the Carhart (1997) four- factor mode and divided in to an expected and unexpected part as in Chua et al. The relation is examined using Fama-MacBeth (1973) regressions with both gross return and the Carhart alpha as dependent variables. The results suggest a positive relation only when using the Carhart alpha as dependent variable and all the control variables. Otherwise the results are inconclusive. As an additional robustness test I perform portfolio sorting on EIV without control variables and get results that suggest a negative relation.}}, author = {{Skogström Lundgren, Kevin}}, language = {{eng}}, note = {{Student Paper}}, title = {{The Relation Between Idiosyncratic Volatility and Returns for U.S. Mutual Funds}}, year = {{2016}}, }