Systemic Risk Centre Seminar
Date: Monday, 5th June 2023
Time: 12.00 - 1.00pm BST (PLEASE NOTE THE EARLIER START TIME)
Speaker: Bing Han (Rotman School of Management, University of Toronto)
Seminar title: Idiosyncratic Volatility and the ICAPM (joint with Gang Li)
Abstract: We show that idiosyncratic volatility under CAPM contains useful information about the risk-return trade-off under the ICAPM. Motivated by the ICAPM pricing relations, we propose new methods to measure the ICAPM covariance risk (covariance of the market and the unobserved hedge portfolio) as well as individual stock exposure to the hedge portfolio using cross-sectional weighted average idiosyncratic volatilities. Our results support the ICAPM predictions about the time series and cross-sectional variations in risk premia. We find that the estimated covariance risk via average idiosyncratic volatilities is a robust time-series predictor of stock market returns. Moreover, stock’s beta with respect to the hedge portfolio is a significant determinant of the cross-section of expected stock returns. Finally, the ICAPM covariance risk closely tracks the tail index of Kelly and Jiang (2014) and explains its predictive power for stock market return.
This is an online only public event, free and open to all, but pre-registration is required. Registrations made after the start of the event may not be approved.