Idiosyncratic volatility and return
| Panel A: Idiosyncratic volatility and the correction of ex ante mispricing | ||||||
|---|---|---|---|---|---|---|
| Variable | (1) | (2) | (3) | (4) | (5) | (6) |
| IVOL (λ1) | 0.8626 (0.99) | 0.7017 (0.78) | 2.9829* (2.52) | 0.8143 (1.39) | 0.7622 (1.34) | 2.9027** (3.47) |
| IVOL * LnP/V(t):Q2 (λ2) | −2.3642** (−3.02) | −2.5912** (−4.56) | ||||
| IVOL * LnP/V(t):Q3 (λ3) | −2.5416** (−3.28) | −2.9431** (−5.22) | ||||
| IVOL * LnP/V(t):Q4 (λ4) | −3.1003** (−4.54) | −3.8869** (−7.66) | ||||
| IVOL * LnP/V(t):Q5 (λ5) | −4.5853** (−6.02) | −4.8386** (−7.65) | ||||
| LnP/V(t):Q2 | −0.0475** (−5.86) | −0.0311** (−3.57) | −0.0304** (−4.20) | −0.0147* (−2.01) | ||
| LnP/V(t):Q3 | −0.0601** (−6.45) | −0.0462** (−4.96) | −0.0317** (−4.19) | −0.0177* (−2.56) | ||
| LnP/V(t):Q4 | −0.0751** (−5.90) | −0.0622** (−4.94) | −0.0391** (−3.62) | −0.0268** (−2.92) | ||
| LnP/V(t):Q5 | −0.1075** (−5.95) | −0.0923** (−5.28) | −0.0508** (−3.73) | −0.0385** (−3.11) | ||
| N | 187,231 | 187,231 | 187,231 | 180,717 | 180,717 | 180,717 |
| R2 | 0.0313 | 0.0432 | 0.0471 | 0.1267 | 0.1278 | 0.1306 |
| Controls | No | No | No | Yes | Yes | Yes |
| Industry FE | No | No | No | Yes | Yes | Yes |
| λ1 + λ2 | 0.6187 (0.44) | 0.3115 (0.31) | ||||
| λ1 + λ3 | 0.4413 (0.31) | −0.0404 (−0.04) | ||||
| λ1 + λ4 | −0.1173 (−0.09) | −0.9842 (−1.01) | ||||
| λ1 + λ5 | −1.6024 (−1.14) | −1.9359† (−1.85) | ||||
| Panel A: Idiosyncratic volatility and the correction of ex ante mispricing | ||||||
|---|---|---|---|---|---|---|
| Variable | (1) | (2) | (3) | (4) | (5) | (6) |
| 0.8626 (0.99) | 0.7017 (0.78) | 2.9829* (2.52) | 0.8143 (1.39) | 0.7622 (1.34) | 2.9027** (3.47) | |
| −2.3642** (−3.02) | −2.5912** (−4.56) | |||||
| −2.5416** (−3.28) | −2.9431** (−5.22) | |||||
| −3.1003** (−4.54) | −3.8869** (−7.66) | |||||
| −4.5853** (−6.02) | −4.8386** (−7.65) | |||||
| −0.0475** (−5.86) | −0.0311** (−3.57) | −0.0304** (−4.20) | −0.0147* (−2.01) | |||
| −0.0601** (−6.45) | −0.0462** (−4.96) | −0.0317** (−4.19) | −0.0177* (−2.56) | |||
| −0.0751** (−5.90) | −0.0622** (−4.94) | −0.0391** (−3.62) | −0.0268** (−2.92) | |||
| −0.1075** (−5.95) | −0.0923** (−5.28) | −0.0508** (−3.73) | −0.0385** (−3.11) | |||
| 187,231 | 187,231 | 187,231 | 180,717 | 180,717 | 180,717 | |
| 0.0313 | 0.0432 | 0.0471 | 0.1267 | 0.1278 | 0.1306 | |
| Controls | No | No | No | Yes | Yes | Yes |
| Industry FE | No | No | No | Yes | Yes | Yes |
| 0.6187 (0.44) | 0.3115 (0.31) | |||||
| 0.4413 (0.31) | −0.0404 (−0.04) | |||||
| −0.1173 (−0.09) | −0.9842 (−1.01) | |||||
| −1.6024 (−1.14) | −1.9359† (−1.85) | |||||
| Panel B: Idiosyncratic volatility and the formation of ex post mispricing | ||||
|---|---|---|---|---|
| Variable | (1) | (2) | (3) | (4) |
| IVOL (λ1) | 2.1212* (2.50) | −1.8672* (−2.49) | 0.7895 (1.50) | −1.8086** (−3.95) |
| IVOL * LnP/V(t + 1):Q2 (λ2) | 2.0528** (2.84) | 1.4121** (3.56) | ||
| IVOL * LnP/V(t + 1):Q3 (λ3) | 2.8230** (4.03) | 1.6470** (3.64) | ||
| IVOL * LnP/V(t + 1):Q4 (λ4) | 5.2171** (7.54) | 3.4584** (6.66) | ||
| IVOL * LnP/V(t + 1):Q5 (λ5) | 11.8252** (7.72) | 10.9243** (7.70) | ||
| LnP/V(t + 1):Q2 | 0.1576** (10.02) | 0.1282** (9.69) | 0.2946** (9.14) | 0.2723** (9.48) |
| LnP/V(t + 1):Q3 | 0.2528** (11.95) | 0.2218** (12.39) | 0.4676** (9.80) | 0.4389** (10.34) |
| LnP/V(t + 1):Q4 | 0.3418** (13.80) | 0.3170** (14.38) | 0.6385** (10.90) | 0.6103** (11.59) |
| LnP/V(t + 1):Q5 | 0.5330** (10.95) | 0.5106** (10.84) | 0.9480** (10.42) | 0.9209** (10.61) |
| N | 187,231 | 187,231 | 180,717 | 180,717 |
| R2 | 0.1283 | 0.1441 | 0.2915 | 0.3032 |
| Controls | No | No | Yes | Yes |
| Industry FE | No | No | Yes | Yes |
| λ1 + λ2 | 0.1855 (0.18) | −0.3965 (−0.65) | ||
| λ1 + λ3 | 0.9558 (0.93) | −0.1616 (−0.25) | ||
| λ1 + λ4 | 3.3498** (3.29) | 1.6498* (2.38) | ||
| λ1 + λ5 | 9.9579** (5.84) | 9.1157** (6.11) | ||
| Panel B: Idiosyncratic volatility and the formation of ex post mispricing | ||||
|---|---|---|---|---|
| Variable | (1) | (2) | (3) | (4) |
| 2.1212* (2.50) | −1.8672* (−2.49) | 0.7895 (1.50) | −1.8086** (−3.95) | |
| 2.0528** (2.84) | 1.4121** (3.56) | |||
| 2.8230** (4.03) | 1.6470** (3.64) | |||
| 5.2171** (7.54) | 3.4584** (6.66) | |||
| 11.8252** (7.72) | 10.9243** (7.70) | |||
| 0.1576** (10.02) | 0.1282** (9.69) | 0.2946** (9.14) | 0.2723** (9.48) | |
| 0.2528** (11.95) | 0.2218** (12.39) | 0.4676** (9.80) | 0.4389** (10.34) | |
| 0.3418** (13.80) | 0.3170** (14.38) | 0.6385** (10.90) | 0.6103** (11.59) | |
| 0.5330** (10.95) | 0.5106** (10.84) | 0.9480** (10.42) | 0.9209** (10.61) | |
| 187,231 | 187,231 | 180,717 | 180,717 | |
| 0.1283 | 0.1441 | 0.2915 | 0.3032 | |
| Controls | No | No | Yes | Yes |
| Industry FE | No | No | Yes | Yes |
| 0.1855 (0.18) | −0.3965 (−0.65) | |||
| 0.9558 (0.93) | −0.1616 (−0.25) | |||
| 3.3498** (3.29) | 1.6498* (2.38) | |||
| 9.9579** (5.84) | 9.1157** (6.11) | |||
Note(s): This table presents results of the main test. The dependent variable () is stock return over 07/01 of t to 06/30 of t + 1, t = 1966 to 2015. is the idiosyncratic volatility measure, defined in Appendix 2. is the difference between the natural logarithm of the market value of equity on 06/30 of t and the natural logarithm of the estimated intrinsic value of equity obtained using the latest accounting information available by 06/30 of t (see Appendix 1). is an indicator variable that equals 1 if is in the i-th annual quintile (0 otherwise), i = 1 to 5. Industry FE stands for industry fixed effects. Controls stands for control variables, defined in Appendix 2. T-statistics in parentheses are adjusted for Newey-West autocorrelations of three lags. **, *, and † denote statistical significance at the 1, 5, and 10% levels, respectively, using a 2-tailed test
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