Using options-implied variance, a forward-looking measure of conditional variance, we revisit the debate on the idiosyncratic risk-return relation. In both cross-sectional (for individual stocks) and time-series (for the market index) regressions, we find a negative relation between...

Using options-implied variance, a forward-looking measure of conditional variance, we revisit the debate on the idiosyncratic risk-return relation. In both cross-sectional (for individual stocks) and time-series (for the market index) regressions, we find a negative relation between...

A spurious positive relation between EGARCH estimates of expected month t idiosyncratic volatility and month t stock returns arises when the month t return is included in the estimation of model parameters. We illustrate via simulations that this look-ahead bias is problematic for empirically...

We propose a novel conditional value premium measure based on the present-value relation that market reaction to a firm's public announcement reveals the firm's discount rates. Specifically, because most splitting stocks are growth stocks on which, by construction, the value premium has strong...

This paper proposes a new measure of ex ante equity premium, IPOFDR, which is the average difference between the offer price and the first-trading-day close price of IPO shares. The relation reflects the stylized fact that IPO issuers only partially incorporate market information during...

We uncover a positive stock market risk-return tradeoff after controlling for the covariance of market returns with the value premium. Fama and French (1996) conjecture that the value premium proxies for investment opportunities; therefore, by ignoring it, early specifications suffer from an...

We argue that changes in average idiosyncratic volatility provide a proxy for changes in the investment opportunity set, and this proxy is closely related to the book-to-market factor. We test this idea in two ways using G7 countries' data. First, we show that idiosyncratic volatility has...

We test and find evidence against Sharpe (1964) and Lintner's (1965) CAPM using portfolios motivated by Campbell's (1993) ICAPM, which is our alternative hypothesis. That is, we sort stocks equally into ten portfolios according to out-of-sample forecasts formed using predictive variables...

This paper shows that a relatively high level of average U.S. industry- or firm-level idiosyncratic stock volatility is usually associated with a future appreciation in the U.S. dollar. For most foreign currencies, the relation is statistically significant in both in sample and out-of-sample...

Over the period 1927:Q1 to 2005:Q4, the average CAPM-based idiosyncratic variance (IV) and stock market variance jointly forecast stock market returns. This result holds up quite well in a number of robustness checks, and we show that the predictive power of the average IV might come from its...