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Working Paper 2003-028B

"Idiosyncratic Volatility, Stock Market Volatility, and Expected Stock Returns"
by Hui Guo, and Robert Savickas

We find that the value-weighted idiosyncratic stock volatility and aggregate stock market volatility jointly exhibit strong predictive power for excess stock market returns. The stock market risk-return relation is found to be positive, as stipulated by the CAPM; however, idiosyncratic volatility is negatively related to future stock market returns. Also, idiosyncratic volatility appears to be a pervasive macrovariable, and its forecasting abilities are very similar to those of the consumption-wealth ratio proposed by Lettau and Ludvigson (2001).

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Category > Applied Econometrics
Category > Finance
Category > Monetary Policy/Macroeconomics
Author > Hui Guo