Incomplete information, idiosyncratic volatility and stock returns

When investors have incomplete information, expected returns, as measured by an econometrician, deviate from those predicted by standard asset pricing models by including a term that is the product of the stock's idiosyncratic volatility and the investors' aggregated forecast errors. If investors are biased this term generates a relation between idiosyncratic volatility and expected stocks returns. Relying on forecast revisions from IBES, we construct a new variable that proxies for this term and show that it explains a significant part of the empirical relation between idiosyncratic volatility and stock returns. (C) 2012 Elsevier B.V. All rights reserved.


Published in:
Journal of Banking & Finance, 37, 2, 448-462
Year:
2013
Publisher:
Amsterdam, Elsevier Science Bv
Keywords:
Laboratories:




 Record created 2013-04-19, last modified 2018-01-28


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