Research On The Idiosyncratic Volatility Puzzle:Based On The Time-specific Phenomenon

Since Ang et al.(2006)[1]found the "Idiosyncratic volatility puzzle" inthe stock market,its existence and how to explain it have became a hot topicin the field of empirical asset pricing.From the perspective of time-specificphenomenon,we reexamine the negative and significant relation betweenidiosyncratic volatility and expected return and explore the puzzle based onthe investor and stock market.Our sample includes NYSE/AMEX/NASDAQ ordinary common stocksover July 1926 to December 2014.On the basis of Fama and French(1993)[2]three factor model,duplicating the research method of Ang et al.(2006)[1],wefirst examine the negative relation between idiosyncratic volatility andexpected returns for the pre-1963 period(192607 to 196306)and thepost-1963 period(196307 to 201412),respectively.The empirical resultsshow that the puzzle only exists in the post-1963 period,and is not existentfor the pre-1963 period.Moreover,when we divide the sample of1963-period into two subsamples in average,that is the July 1963 toDecember 1989 sample and the January 1990 to December 2014.Using theportfolio analysis method,we find that the idiosyncratic volatility puzzle is adata snooping bias,and for the post-1963 period,it only exists in the previous26 years(July 1963 to December 1989).All the results suggest that theidiosyncratic volatility puzzle is not robust and is time-varying.Therefore,we discover that the idiosyncratic volatility puzzle is a time-specificphenomenon.For the puzzle during the July 1963 to December 1989 period,we firstlyfocus on the idiosyncratic risk measuring from investor standpoint.On thebasis of Fama and French(2015)[3]five factor model and different tradingstrategies,we again estimate the idiosyncratic volatility.Meanwhile,we alsoconsider the infrequent trading and short return reversals from the stockmarket,and analyze this puzzle comprehensively with portfolio analysis andthe cross-sectional regression analysis.The empirical results indicate that,to some extent,trading strategy and infrequent trading could explain the puzzle.Meanwhile,there is no significant relation between idiosyncratic volatility and expected return once previous returns are controlled for,which illustrates that the idiosyncratic volatility puzzle not only is a time-specific phenomenon and could be explained from the investor and stock market viewpoints.Therefore,we conclude that the negative significantly relation between idiosyncratic volatility and expected return and is not universal.In this paper,we firstly study the idiosyncratic volatility puzzle from the data mining and provide new evidence and idea for the explanation of puzzle.Our research is favorable to understand the puzzle in a different perspective for investors.The conclusions have some theoretical contribution and empirical support for the efficient markets hypothesis,which enrich and perfect the asset pricing theory.