Idiosyncratic Volatility And Stock Returns

The relationship between the risk of investment and stock returns has been the most important research of financial theory,in recent years,the study on the relationship between idiosyncratic volatility and expected return becomes the core of theory research.The classical capital asset pricing theory assumes that based on efficient market,investors can avoid idiosyncratic risk by holding diversified portfolios,only systemic risk affect stock returns.However,recent researches find that market is not efficient.Affected by incomplete information and short-selling mechanism of market,investors cannot hold a perfect diversified portfolio.According to this,idiosyncratic risk affects stock returns.Since idiosyncratic risk cannot be dispersed,it is desirable that a certain amount of excess return is needed as part of the risk compensation,that is,the idiosyncratic risk is positively related to the stock return.But the academic research in recent years through the empirical analysis of the idiosyncratic risk and stock returns is negatively related to the conclusion,contrary to the traditional capital asset pricing theory,resulting in the idiosyncratic volatility anomaly,also known as the "idiosyncratic volatility puzzle",so far there is no theory can be a perfect explanation of this puzzle.In order to verify the idiosyncratic volatility puzzle in stock market of our country,we chose the Shanghai A-share market data from January 2,2001 to December 31,2015,using the CAPM model and Fama-French three factor model to extract the idiosyncratic volatility,and take the rolling window to calculate residual of two regression models,then take the variance of the residuals as idiosyncratic volatility,finally compare idiosyncratic volatility and the expected return to verify the relationship.In order to explore whether the “idiosyncratic volatility puzzle " is caused by the short selling limit,this paper also makes an empirical study on the financing and securities lending business.Finally,in order to test the reliability of the research results,this paper also carried out a robust test for different sample intervals before and after the reform of the split share structure reform.The empirical research found that: the stock idiosyncratic volatility in the Chinese A-share market has negative correlation with the expected rate of return in the next 5 trading days,and both CAPM model and Fama-French three factor model have confirmed this negative correlation relationship,and different extractions of idiosyncratic volatility is not the cause of idiosyncratic volatility puzzle,and the breaking of short selling restrictions cannot change the negative correlation.The results of robustness test shows that,the "idiosyncratic volatility puzzle” exists in the range of the stock market of our country,and it is not changed because of different research data.The results of this study complement the existing literature and verify the idiosyncratic volatility puzzle based on the particularity of the Chinese stock market.