Research On "The Puzzle Of Idiosyncratic Volatility" In China's A-share Market

In global security markets,the risk and return of stocks have been the focus of theoretical research.The study of that is mainly based on Modern Portfolio Theory and Capital Asset Pricing Model(CAPM).In the classic model CAPM,the capital market is effective;the market risk is measured by the volatility,which is positively related to the profit;risk-preferring investors are long to get more benefits with higher risk.After the 1980s,various financial anomalies emerged,and scholars began to realize that CAPM model might have something missed.Idiosyncratic risk is different from system risk,which can't be measured directly in the asset pricing model and usually measured by the variance or standard deviation of the model regression residual.Merton(1987)firstly discovered the phenomenon in theory,which was once regarded as truth by academics.However,Ang,Hodrick,Xing&Zhang(2006,referred to as AHXZ)used Fama&French Three-Factor Model(1993)to calculate idiosyncratic volatility and find that is negatively correlated with the expected return on the stock.It's the first time that existence of "the puzzle of idiosyncratic volatility" was confirmed,since then the related research prologue was opened."The puzzle of idiosyncratic volatility" have great impacts on the traditional theory,and scholars of different views have not reached a consensus conclusion yet.In the context,the article to explore "the puzzle of idiosyncratic volatility" in China's A-share market has practical significance.The paper focuses on three issues:(1)have a discussion about development process of "the puzzle of idiosyncratic volatility" in both theoretical and empirical dimensions,and test its existence in China's A-share market;(2)measure the idiosyncratic risk,and optimize the most suitable model in Chinese condition;(3)in-depth study the causes of "the puzzle of idiosyncratic volatility" and the significant factors of the stock excess returns,and provide reasonable recommendations as investment strategies.Research designs are as follows:Firstly,calculate factors through investment portfolio and two-dimensional analysis method based on 1186 sample stocks listed on the Chinese A-share board.Then,construct Fama&French models with three,four and five factors to calculate the idiosyncratic volatility for cross-sectional regression of the stock portfolio excess returns,and observe the relationship between the volatility and the returns of the stock portfolio.Finally,the regression model is constructed to explore the turnover rate,leverage,information disclosure index and other factors on the relationship between the idiosyncratic volatility and the expected return of the stock.The main conclusions are draw as follows:(1)In Chinese A-share market,"the puzzle of idiosyncratic volatility" exist exactly,where the idiosyncratic volatility is verified by the regression residual of the factor model.(2)The Four-Factor Model is most suitable in Chinese conditions,while the Five-Factor Model can best reflect the existence of the puzzle,which can be optimized by eliminating the profitability factor(RMW);(3)the reversal effect of short-term and long-term,and momentum effect can explain the cause of the puzzle,which is related to lag effect or term structure.Among them,the smaller the spread,the stronger the liquidity,the greater the book-to-market ratio(the lower the price-earnings ratio),the smaller the size of the company,the higher the stock's expected cross-section earnings.Besides,the indicator of quality of information disclosure does not apply to Chinese conditions.All that can be useful and provide reference for investors to make right investment strategies.