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The Common Factor in Idiosyncratic Volatility: Quantitative Asset Pricing Implications / Bernard Herskovic, Bryan T. Kelly, Hanno Lustig, Stijn Van Nieuwerburgh.
- Format:
- Book
- Author/Creator:
- Herskovic, Bernard.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w20076.
- NBER working paper series no. w20076
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Other Title:
- Common Factor in Idiosyncratic Volatility
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2014.
- Summary:
- We show that firms' idiosyncratic volatility obeys a strong factor structure and that shocks to the common factor in idiosyncratic volatility (CIV) are priced. Stocks in the lowest CIV-beta quintile earn average returns 5.4% per year higher than those in the highest quintile. The CIV factor helps to explain a number of asset pricing anomalies. We provide new evidence linking the CIV factor to income risk faced by households. These three facts are consistent with an incomplete markets heterogeneous-agent model. In the model, CIV is a priced state variable because an increase in idiosyncratic firm volatility raises the average household's marginal utility. The calibrated model matches the high degree of comovement in idiosyncratic volatilities, the CIV-beta return spread, and several other asset price moments.
- Notes:
- Print version record
- April 2014.
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