Abnormal Returns and Idiosyncratic Volatility Puzzle: Evidence from the Chinese Stock Market. Issue 5 (9th April 2019)

• Record Type: Journal Article
• Authors: Qu, Zhengyang; Liu, Xiaotian; He, Shi
• Is Part Of: Emerging markets finance & trade. Volume 55:Issue 5(2019)
• Page Start: 1184
• Page End: 1198
• Publication Date: 2019-04-09
• Subjects: abnormal returns -- idiosyncratic volatility -- prospect theory; Balkan Peninsula -- Commerce -- Periodicals; Balkan Peninsula -- Foreign economic relations -- Periodicals; Europe, Central -- Commerce -- Periodicals; Europe, Central -- Foreign economic relations -- Periodicals; Europe, Eastern -- Commerce -- Periodicals; Europe, Eastern -- Foreign economic relations -- Periodicals; Turkey -- Commerce -- Periodicals; Turkey -- Foreign economic relations -- Periodicals; Asia -- Commerce -- Periodicals; Asia -- Foreign economic relations -- Periodicals; Eurasia -- Commerce -- Periodicals; Eurasia -- Foreign economic relations -- Periodicals; 382.05
• DOI: 10.1080/1540496X.2018.1468249
• Languages: English
• ISSNs: 1540-496X

Abstract

ABSTRACT: The well-documented idiosyncratic volatility anomaly indicates the stocks with higher idiosyncratic volatility tend to have lower returns. Using different models to estimate abnormal return (i.e. alpha), we show that in the Chinese stock market, the IVOL-return relation is negative among stocks with negative abnormal returns but positive among stocks with positive abnormal returns. A possible explanation is that when we take the expected return as the reference point, different signs of abnormal returns can be viewed as gains and losses. Under prospect theory, distinct risk attitudes in the domain of gains and losses lead to different IVOL-return relations.