We apply a new econometric method -- the generalized method of moments under a common shock -- to estimate idiosyncratic volatility premium and average idiosyncratic stock volatility. In contrast to the popular two-pass estimation approach of Fama and MacBeth (1973), the method requires using...

We investigate empirical properties of idiosyncratic volatility using cross-sections of stock returns in the standard framework of geometric Brownian motion price dynamics. Knowledge of the sign and magnitude of idiosyncratic volatility characteristics may help us better understand the role of...

A GMM estimation approach is developed for a stylized cross-sectional model with a non-localized common data shock. Common shocks are often encountered in economics and finance. Thus, their implications for estimation are of substantial interest. Other researchers investigated properties of OLS...

This paper proposes a new approach to estimate the idiosyncratic volatility premium. In contrast to the popular two-pass regression method, this approach relies on a novel GMM-type estimation procedure that uses only a single cross-section of return observations to obtain consistent estimates....

This study designs methodology for computation trading policy for a terminal-time borrowing-constrained investor, who operates in complete markets allowing delta-hedging. A specific example of a log-utility trader in geometric Brownian motion framework illustrates the general findings....

Theoretical no-arbitrage option prices are not unique in incomplete markets. This complication stems from the unknown risk-premium, which plays an important role in the option valuation problem. This paper establishes restrictions on the risk-premium parameters. The major tools of this research...