Journal
EMERGING MARKETS FINANCE AND TRADE
Volume 55, Issue 5, Pages 1184-1198Publisher
ROUTLEDGE JOURNALS, TAYLOR & FRANCIS LTD
DOI: 10.1080/1540496X.2018.1468249
Keywords
abnormal returns; idiosyncratic volatility; prospect theory
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The well-documented idiosyncratic volatility anomaly indicates the stocks with higher idiosyncratic volatility tend to have lower returns. Using different models to estimate abnormal return (i.e. alpha), we show that in the Chinese stock market, the IVOL-return relation is negative among stocks with negative abnormal returns but positive among stocks with positive abnormal returns. A possible explanation is that when we take the expected return as the reference point, different signs of abnormal returns can be viewed as gains and losses. Under prospect theory, distinct risk attitudes in the domain of gains and losses lead to different IVOL-return relations.
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