An Empirical Study On The Relationship Between The Idiosyncratic Volatility And Stock Returns In China

The classical capital asset pricing theory based on Markowitz portfolio theory holds that stock risk is composed of market risk and non-market risk.Non-market risks can usually be eliminated through decentralized portfolios.For many years,the model has played a dominant role in the price theory of financial market,and has been widely used in financial fields such as corporate finance,securities investment and so on.However,the capital asset pricing model also has its limitations:its hypothetical conditions are difficult to be realized in practice,investors have asymmetric information,and there are transaction costs and tax in the market.These reasons has greatly reduced its ability to predict future stock returns.Therefore,in recent years,a large number of researchers have studied the relationship between stock return and investment risk.Some western scholars believe that stock returns are in some cases disturbed by corporate-level idiosyncratic risk.Investors should expect compensation for trait risk,so that the relationship between stock returns and trait risk can be inferred as a positive correlation.However,in recent years,with the continuous development of financial theory,a large number of scholars have violated the traditional capital asset pricing theory through empirical analysis,that is,trait risk and stock returns have a negative correlation.Experts and scholars also call it the mystery of idiosyncratic volatility.Whether the the mystery of idiosyncratic volatility exists or not,and what is the cause of the mystery of idiosyncratic volatility is still the focus of scholars in the academic field.The relationship between stock return and investment risk is of great significance both in theory and in practice.Therefore,it is a worthy thing for Chinese scholars to study whether there is such a mystery of idiosyncratic volatility mentioned above in the stock market of our country or not.In this paper,all A shares in the Shanghai Composite Index(000001)from January 1,2001 to December 31,2017 are selected as a sample of daily data for a total of 4364 trading days.Using Fama-French three-factor model and Fama-French five-factor model to extract the residual error of the model as a idiosyncratic volatility.The proxy variable of the rate is used for regression to verify the relationship between stock returns and investment risk.The empirical results of the two models confirm that there is a negative correlation between the two factors,and the consistent conclusion of different models also proves that the different methods of extracting idiosyncratic volatility are not the reasons for this negative correlation.Through the empirical test of the split of margin sample interval,it is proved that the breakthrough of short selling restriction can not affect this negative correlation.According to the uniqueness of Chinese stock market,the research in this paper proves that "the mystery of idiosyncratic volatility" will also occur in Chinese stock market.