The Idiosyncratic Volatility Anomaly

The traditional financial theory is based on the assumption that the market is effective,the investor is rational and the information is complete.It proposes that in the equilibrium market,the idiosyncratic risk at the company level can be dispersed through the investment portfolio,and the stock returns are only affected by the systemic risk.However,Ang et al.(2006,2009)[1][2] proposed a significant negative relationship between volatility and stock returns.Many scholars focus on the existence?causes and influencing factors of the anomaly.In the field of asset pricing,it is still a heated issue in empirical research.Based on the discussion of the relationship between idiosyncratic volatility,R&D investment and stock returns,this paper attempts to explain the idiosyncratic volatility puzzle from the perspective of R&D investment.Our sample includes all ordinary common stocks of AMEX?NYSE and NASDAQ stock markets over July 1976 to December 2017.Firstly,following the method of Ang et al.(2006)[1],we based on Fama and French(1993)[3] three-factor model to estimate the idiosyncratic volatility.We re-examined the anomaly through time series analysis and portfolio analysis.Secondly,we explore the relationship between R&D investment and idiosyncratic volatility under different R&D investment metrics.We find that R&D investment calculated by equity market value perform better than the other one.Finally,we further consider how R&D investment affects the relationship between stock returns and idiosyncratic volatility.Our empirical results show that R&D investment measured by equity market capitalization not only has a positive impact on idiosyncratic volatility,but also further mitigates the negative relationship between stock returns and idiosyncratic volatility;in particular,relative to low R&D investment companies,this effect is more significant in high R&D investment companies.In other words,R&D investment can partly explain the idiosyncratic volatility puzzle.In this paper,we systematically study the relationship between idiosyncratic volatility,R&D investment and stock returns.We firstly try to explain idiosyncratic volatility puzzle from the perspective of R&D investment.Our research not only enriches the research literature on the relationship between stock expected returns and idiosyncratic volatility,but also enriches the research literature on the relationship between R&D investment and idiosyncratic volatility,and provides new perspective and evidence for the explanation of the anomaly.