Research Of Idiosyncratic Volatility Puzzle On Chinese Stock Market

Many empirical studies have shown the significant negative correlation between Idiosyncratic Volatility of stock with the expected return of stocks.This anomaly is called the “Idiosyncratic Volatility Puzzle”.Since the discovery of a significant negative correlation between the Idiosyncratic Volatility with the cross-sections expected return of stock,the test and exploration of the “Idiosyncratic Volatility Puzzle” has become one of the popular topics in the field of asset pricing.However,in the study of the “Idiosyncratic Volatility Puzzle”,the reasons for the interpretation of the Idiosyncratic Volatility anomaly are not same.Different from the previous literature,this paper tries to explain “Idiosyncratic Volatility Puzzle” on Chinese stock market from a rational perspective and an irrational perspective.The rational perspective uses firm-specific Information,and the irrational perspective constructs the arbitrage limit index,trying to explain the Idiosyncratic Volatility anomaly.Firstly,this paper uses the Fama-French three-factor method to obtain the Idiosyncratic Volatility,and through the portfolio analysis and Bivariate portfolio analysis constructed by the 1/0/1 strategy,it is verified that the “Idiosyncratic Volatility Puzzle” is significant in the Chinese stock market,then through the CAPM model and the Fama-French three-factor to correct alpha,further verified the significant negative correlation between the Idiosyncratic Volatility of China's stock market and the expected rate of return.Secondly,based on valuation theory and Fama-French five-factor model,this paper attempts to explain the “Idiosyncratic Volatility Puzzle” on Chinese stock market volatility through the perspective of investor rationality,using the company's profitability and investment level information.Through the Fama-Macbeth regression,it is found that the factors of profitability and investment level information of listed companies in Chinese stock market cannot significantly eliminate the significant negative correlation between Idiosyncratic Volatility and expected rate of return in the regression,and found that the investment factors in foreign market were not applicable.The research results are not applicable in the Chinese market,so it cannot fully explain the “Idiosyncratic Volatility Puzzle” on the Chinese market from rational perspective.Next,this paper attempts to explain the irrational volatility vision from the irrational aspect of investors as the wrong pricing caused by the investor heterogeneous belief,and combines the uniqueness of the Chinese market to construct the comprehensive arbitrage factor index of the Chinese market,special.The arbitrage factor index and the traditional arbitrage factor index,a two-dimensional portfolio analysis constructed using the 1/0/1 strategy and the Fama-Macbeth cross-sectional regression,show that the arbitrage limitation largely explains the “mystery of trait volatility”.It has weakened its significant negative correlation.Finally,the robustness test of this paper is to study the persistence of the interpretation of the arbitrage restriction on the "mystery of trait volatility" by two-dimensional group analysis,and to select the proxy variable of heterogeneous belief to further carry out FM regression,which proves the heterogeneous belief pair.The explanatory role of the mystery of trait volatility.