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Quality's relationship to the idiosyncratic volatility puzzle

Ingvarsson, Carl Johan LU (2020) NEKN01 20201
Department of Economics
Abstract
This paper examines the well documented relationship between idiosyncratic volatility and mean
returns. By using the recently published quality-minus-junk factor this paper attempts to explain
both the abnormal performance of portfolios sorted on idiosyncratic volatility as well as the crosssectional pricing of idiosyncratic volatility. Using data from the U.S. it is shown that the quality
factor is able to explain the abnormal performance of the extreme portfolios in the idiosyncratic
volatility puzzle, while having no impact on the cross-sectional stock returns. This indicates that
the quality-minus-junk factor plays an important role in determining the performance of the portfolios and further research should include it in any... (More)
This paper examines the well documented relationship between idiosyncratic volatility and mean
returns. By using the recently published quality-minus-junk factor this paper attempts to explain
both the abnormal performance of portfolios sorted on idiosyncratic volatility as well as the crosssectional pricing of idiosyncratic volatility. Using data from the U.S. it is shown that the quality
factor is able to explain the abnormal performance of the extreme portfolios in the idiosyncratic
volatility puzzle, while having no impact on the cross-sectional stock returns. This indicates that
the quality-minus-junk factor plays an important role in determining the performance of the portfolios and further research should include it in any model aiming to investigate this puzzle. (Less)
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author
Ingvarsson, Carl Johan LU
supervisor
organization
course
NEKN01 20201
year
type
H1 - Master's Degree (One Year)
subject
keywords
Idiosyncratic volatility puzzle, quality, portfolio performance, cross-sectional of returns.
language
English
id
9027212
date added to LUP
2020-08-29 10:35:16
date last changed
2020-08-29 10:35:16
@misc{9027212,
  abstract     = {This paper examines the well documented relationship between idiosyncratic volatility and mean
returns. By using the recently published quality-minus-junk factor this paper attempts to explain
both the abnormal performance of portfolios sorted on idiosyncratic volatility as well as the crosssectional pricing of idiosyncratic volatility. Using data from the U.S. it is shown that the quality
factor is able to explain the abnormal performance of the extreme portfolios in the idiosyncratic
volatility puzzle, while having no impact on the cross-sectional stock returns. This indicates that
the quality-minus-junk factor plays an important role in determining the performance of the portfolios and further research should include it in any model aiming to investigate this puzzle.},
  author       = {Ingvarsson, Carl Johan},
  keyword      = {Idiosyncratic volatility puzzle,quality,portfolio performance,cross-sectional of returns.},
  language     = {eng},
  note         = {Student Paper},
  title        = {Quality's relationship to the idiosyncratic volatility puzzle},
  year         = {2020},
}