Research On "Idiosyncratic Volatility Puzzle" In China's Stock Market

Idiosyncratic volatility is a measure of idiosyncratic risk.According to the classic capital asset pricing theory,if investors could hold sufficiently effective portfolios,the idiosyncratic would be completely eliminated,so that stock returns are only affected by systemic risks.However,the real stock market is not completely effective,and it is almost impossible for investors to hold completely diversified portfolios,so the idiosyncratic risks also have a degree of-influence on stock returns.In addition,contrary to the classic CAPM theory,a large number of studies also drew a conclusion that the idiosyncratic volatility is negatively correlated with stock returns,experts and scholars named this phenomenon "idiosyncratic volatility puzzle".In recent years,Chinese scholars conducted empirical research in China's stock market,and they found that this financial phenomenon is also exist in our stock market,on this basis,they explored the causes of it,main directions include heterogeneous beliefs,lottery-type stocks preference and limits of arbitrage.So far,there's still no definitive explanation.This paper selected a sample data containing A-shares traded on the Shanghai Stock Exchange(SHSE)including 788 individual stocks from August 1,2011 to January 31,2019.The idiosyncratic volatility is calculated by CAPM model,Fama-French three-factor model and Fama-French five-factor model at the same time,so as to avoid the influence of different calculation methods on the result.Besides that,this paper constructs portfolios with high and low idiosyncratic volatility,uses the method of portfolio analysis to find the relationship between idiosyncratic volatility and expect return and explores whether other factors would influence this relationship.In addition,according to behavioral finance,arbitrageurs will be limited by factors such as fundamental risk,principal-agent risk,market system,etc.,resulting in the deviation of stock price is difficult to be corrected through market behavior.Some experts and scholars have suggested that arbitrage restrictions may also be one of the causes of"idiosyncratic volatility puzzle".On this basis,as China's stock market is still in the development stage and imperfect,policy intervention is frequent so that the formulation or change of market system has a great impact on stock price and the risk and cost of arbitrage,making arbitrage behavior more restricted.This paper attempts from arbitrage restrictions caused by the special trading system of China's stock market perspective,constructs an arbitrage constraint factor with the price limit rule,short selling constraint and the availability of the index future and use the method of two-dimensional group analysis and Fama-Macbeth two-stage regression to study whether the arbitrage constraint policy will affect the phenomenon of "idiosyncratic volatility puzzle".The contributions of this article are as follows:Firstly,based on three different asset pricing models,it is confirmed that in China's stock market,the idiosyncratic volatility has a negative correlation with stock returns,and taking of different ways of extracting the idiosyncratic volatility does not influence this conclusion.Secondly,Using the methods of portfolio analysis,two-dimension group analysis and Fama-MacBeth two-stage regression,this paper finds that "the "idiosyncratic volatility puzzle" cannot be explained by risk indicators such as book-to-market ratio,momentum,circulation market value.swing and flrm size,and although the turnover rate and trading volume index will affect the strength of this correlation to some extent,but in general.this negative correlation always exists.which further enhances the robustness of the conclusion above.Finally,few existing studies explained the phenomenon in China's stock market from the perspective of limits of arbitrage,which considers the special system of China's stock market is more rare,the innovation of this paper is to examine whether the limits-of-arbitrage caused by China's unique trading constraints could explain the"idiosyncratic volatility puzzle",and puts forward some advice for regulators,listed companies and investors.