| Idiosyncratic volatility is defined as the error term in accordance with certain pricing models, in addition to all factor may be pricing, and company level characteristics not related to pricing.About correlation between idiosyncratic volatility risk and expected rate of return between academia is full of controversy. According to classical capital asset pricing model in the efficient market hypothesis, investors can construct portfolios of assets to completely eliminate idiosyncratic risk, so that the relationship between idiosyncratic volatility and expected return of the portfolio is not relevant. But Merton (1987) believes, as investors will be subject to information asymmetry, transaction costs of various factors, investment experience and other restrictions, can not hold fully diversified portfolio. Investors assume the risk of additional volatility will inevitably require higher investment income as compensation, which should be a positive correlation between the company’s idiosyncratic volatility and expected investment returns. However, recently some scholars in the study found an inverse correlation between idiosyncratic volatility and expected return on investment, which was called "The Mystery of Idiosyncratic Volatility".The research on the relationship between the company idiosyncratic volatility and its investment income has very important significance. First, the idiosyncratic volatility characteristics of the company reflects the company’s information, so that fluctuations in the level of stocks idiosyncratic risk, will be in investors when capital allocation, have an important impact on investors. Second, with the rapid development of financial markets, idiosyncratic risk of individual stocks has become the main part of the risk of individual stocks, diversification of revenue is also declining, so investors have to bear higher idiosyncratic risk, idiosyncratic risk of making pricing become one of the key issues of investor attention. Finally, with the growing size of the financial market as well as increasing the risk characteristics of the company’s research, development and characteristics of the risks associated with financial products and rational utilization of idiosyncratic risk to get certain benefits of financial innovation becomes possible.However, it started later than the foreign that the domestic scholars researched for idiosyncratic volatility and correlation between expected return, the scope of the study was also relatively narrow, and the research is still in the preliminary stage at present. Most domestic scholars in the study of relationship between idiosyncratic volatility and expected return, more than the use of F-F three factors model of residual error as a measure of idiosyncratic volatility, and F-F three factors in the model scale factor (SMB) and book value ratio (HML) factors partly belongs to the company quality factors, thus by three factors of residual to estimate idiosyncratic volatility would produce a certain degree of deviation.In addition, in March 2010, the official start of the our country since the implementation of the pilot securities lending and borrowing, margin trading has begun to take shape, China’s stock market is no longer a strict limits in short. After to ease restrictions on short selling, idiosyncratic volatility and correlation between expected returns are changed and what changes have taken place in research is rare.In this paper, the accuracy and convenience are considered, we use the indirect separation, method which is based on the CAPM to estimate the idiosyncratic volatility and study the relationship between the expected return. First of all, indirect separation method using CAPM model and weighted according to the current market, the stocks total risk is decomposed into market risk level, industry level and company quality risks. Second, from January 2005 to December 2014, the Shanghai A shares in the company initially the trend of the sequence of idiosyncratic risk characteristics, on the basis of the analysis and research from the perspective of the whole securities market the quality of listed companies risk for future market earnings forecast and explain ability. Again, for the research of market different whether the idiosyncratic volatility and the relationship between expected returns, this paper will all a-share samples divided into shenzhen and Shanghai stock market by the market, studied its respectively. In addition to the implementation of the securities lending and borrowing business as the point of division, in January 20051 solstice in 2010 on March 31 and April 1,2010 to March 31,2015, two periods data for empirical research, the main research of our country after the stock market to ease restrictions on short selling, idiosyncratic volatility and correlation between expected returns are changed and what has changed. Finally, in order to further verify the robustness, this paper this paper and the use of F-F three factors model to measure the regression residuals idiosyncratic volatility, and its data from regression analysis. Eventually through empirical study found that:(1) The proportion of company idiosyncratic risk in total risk, in addition to individual point, the other most of the time showed a steady upward trend overall. (2) There is no obvious relationship between market returns and the industry level risk or market risk level. (3) Before our country securities market in the securities lending and borrowing business launched,there is a negative relationship between the company idiosyncratic risk and expected return, which is called "idiosyncratic volatility puzzle"; after the securities lending and borrowing business launched, the negative relationship between Idiosyncratic risk in stocks of companies and expected return becomes less significant. (4) After the securities lending and borrowing business launched, although the negative correlation relationship between the company idiosyncratic volatility and expected returns diminishes or even disappears, but did not present a significant positive correlation, idiosyncratic volatility is still unable to reasonably valued by the market. |
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