An Anatomic Study of the Relationship between Stock Return and Idiosyncratic Volatility Evidences from Tehran Stock Exchange

Document Type : Research Paper

Authors

1 Shahid Beheshti University,

2 Shahid Beheshti University, Shahid

Abstract

The purpose of this study is to explain the opposite of the idiosyncratic volatility based on breaking up the idiosyncratic volatility into expected idiosyncratic volatility (EIV) and unexpected idiosyncratic volatility (UIV) and analyzing its split effects on the explanation of cross-sectional changes of individual stock. This relationship is studied in a sample consisting of 95 companies approved in the Tehran Stock Exchange during the years 2002 and 2011 using Fama-Macbeth regression model (1973) and the portfolio approach. The evidences from the study show that EIV alone is not able to explain the return changes, so by taking both EIV and UIV simultaneously, the positive coefficient of UIV becomes meaningful in terms of the statistics. If size, book value to market value ratio, momentum, liquidity and dilatory effect are controlled, the results would remain the same. So it seems like the main source of the opposite of the idiosyncratic volatility in Tehran Stock Exchange is caused by the unexpected idiosyncratic volatility.

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References

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Journal of Asset Management and Financing
Volume 3, Issue 3 - Serial Number 3
December 2015
Pages 37-48

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