Study On The Idiosyncratic Volatility And Expected Return:Evidence From China's Stock Markets

Academic circles debate on the correlation between the risk and return. According to the capital asset pricing model, investors can hold diversified portfolios to avoid the firm-specific risk, that is, risk of portfolios and expected return are irrelevant. Actually, affected by transaction costs, asymmetric information, economic status, occupation, education and so on, many investors can hardly construct a perfectly diversified market portfolio. Investors require a higher investment income to offset the idiosyncratic risk, that is, there should be a positive relation between the idiosyncratic risk and the expected return. However, some recent empirical research shows that the idiosyncratic volatility of stock and the expected return have a negative correlation, a phenomenon known as "the idiosyncratic volatility puzzle". So far, this phenomenon can not be well explained by financial theory. In this paper, the idiosyncratic volatility is estimated by the standard deviation of residuals from the Fama-French three-factor regression model, and we use the portfolios method, the two-dimensional analysis method and Fama-Macbeth method to test the relationship between the idiosyncratic volatility and expected return before and after the securities margin trading is carried out. We finds that:1) Before and after the securities margin trading is carried out, there is a strongly statistically significant negative relationship between the idiosyncratic volatility and expected return, and this phenomenon can not be explained by the company size, book value ratio, mobility, co-skewness, transaction costs; 2) Turnover may partly explain this phenomenon. Because turnover is a measure of indicators of heterogeneous beliefs, this article gives an explanation for the idiosyncratic volatility puzzle from the perspective of heterogeneous beliefs. In addition, from the aspects that the threshold is high, size and scope of the underlying securities is small, our economic environment the stock market facing, we analyze the existence of the phenomena after the securities margin trading is carried out. We think that the negative margin so far did not really release the power, so after the launch of securities margin trading, the stock of China still exist the phenomenon that the idiosyncratic volatility and expected return are negative.