Idiosyncratic volatility and the cross-section of anomaly returns: is risk your Ally?
Adam Zaremba , Alina Maydybura
AbstractDue to arbitrage risk asymmetries, the relationship between idiosyncratic risk and expected returns is positive (negative) among overpriced (underpriced) stocks. We offer a new active anomaly-selection strategy that capitalizes on this effect. To this end, we consider 11 equity anomalies in the U.S. market for years 1963–2016. Buying (selling) long (short) legs of the anomaly portfolios with the highest idiosyncratic volatility produces monthly abnormal returns ranging from 0.97% to 1.14% per month, outperforming a naive benchmark that equally weights all the anomalies by 45–70%. The effect cannot be subsumed by any other established anomaly-return predictor, such as momentum or seasonality. The results are robust to many considerations, including different numbers of anomalies in the portfolios, subperiod analysis, as well as estimation of idiosyncratic risk from the alternative models and throughout different periods.
|Journal series||Applied Economics, ISSN 0003-6846, e-ISSN 1466-4283, (N/A 40 pkt)|
|Publication size in sheets||0.5|
|Keywords in Polish||anomalie rynku kapitałowego, ryzyko specyficzne, zmienność specyficzna, wycena aktywów, przekrój stóp zwrotu, prognozowanie stóp zwrotu|
|Keywords in English||Equity anomalies, idiosyncratic risk, idiosyncratic volatility, asset allocation, asset pricing, return predictability, the cross-section of stock returns|
|Score||= 40.0, 03-04-2020, ArticleFromJournal|
|Publication indicators||= 1; : 2018 = 0.781; : 2017 = 0.75 (2) - 2017=0.906 (5)|
|Citation count*||1 (2020-06-25)|
* presented citation count is obtained through Internet information analysis and it is close to the number calculated by the Publish or Perish system.