Low-Idiosyncratic Volatility Anomaly And Ambiguity Premium

Returns and risk are two core issues in financial research.There is a positive correlation between the expected returns and risk of assets in the classical pricing model;and only systematic risk is priced,unsystematic risk is not considered due to their full dispersion.In recent years,more and more scholars have discovered that there is a negative correlation between the expected returns and risk of assets,which are called low-risk anomaly.Low-risk anomaly exist in both developed and emerging markets.Low-risk anomaly are mainly consisted of low-volatility anomaly,low-β anomaly,and low-idiosyncratic volatility anomaly.This paper focuses on the low-idiosyncratic volatility anomaly.Firstly,we estimate realized idiosyncratic volatility and used as a benchmark.Because the idiosyncratic volatility does not obey the random walk process,so we use the EGARCH(1,1)model to predict the idiosyncratic volatility,which measures the unsystematic risk has long-term stability.Using the data of all A-share stocks from January 1,2007 to December 31,2007 as a sample,we use the portfolio formation strategy to study the existence of low-idiosyncratic volatility anomaly in Chinese stock market,and two-dimensional grouping and cross-sectional regression to interpret the anomaly by the variable,also proposes a new interpretation of the degree of ambiguity.Ambiguity is a dimension of uncertainty not accounted for by risk.For high idiosyncratic volatility stocks,investors exhibit ambiguity preference,and the ambiguity premiums is negative;for low idiosyncratic volatility stocks,investors exhibit ambiguity aversion;overall,investors are ambiguity seeking.1).Chinese stock market has a low-idiosyncratic volatility anomaly,and the anomaly mainly comes from the low-returns of the high-idiosyncratic volatility portfolio;2).The low-idiosyncratic volatility anomaly is obvious during the period of stock market volatility,and not obvious during the period of stock market stable;3).Size,book to market ratio,stock illiquidity,and reverse all cannot explain the low-idiosyncratic volatility anomaly,but heterogeneous beliefs and investor attention can explain the anomaly;4).The degree of ambiguity can explain the low-idiosyncratic volatility anomaly;5).There are ambiguity seeking behavior in Chinese stock market,and significant gains can be obtained by selling high-ambiguity portfolios and buying low-ambiguity stock portfolios.