Expected idiosyncratic volatility (IVOL) and its positive relation to expected returns of Fu (2009) can be closely replicated, but only when we include information up to time t to estimate the IVOL at time t. Since this involves look-ahead bias, we re-estimate expected IVOL using information only up to time t−1. We find no significant relation between IVOL and returns, and our results are robust to the sample periods extended to before and after that of Fu (2009). Our findings are consistent with the fact that idiosyncratic risk is not priced.
Critical Finance Review, Volume 12, Issue 1-4 Special Issue: Volatility and Higher Moments: Articles Overview
See the other articles that are part of this special issue.