Idiosyncratic volatility, growth options, and the cross-section of returns

Barinov, Alexander and Chabakauri, Georgy ORCID: 0009-0002-7980-269X (2023) Idiosyncratic volatility, growth options, and the cross-section of returns. Review of Asset Pricing Studies, 13 (4). 653 – 690. ISSN 2045-9920

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Abstract

The value effect and the idiosyncratic volatility (IVol) discount arise because growth firms and high IVol firms beat the CAPM during periods of increasing aggregate volatility (market volatility and average IVol), that makes their risk low. All else equal, growth options' value increases with volatility, an effect that is stronger for high IVol firms, for which growth options take a larger fraction of the firm value and firm volatility responds more to aggregate volatility changes. The factor model with the market factor, the market volatility risk factor, and the average IVol factor explains the value effect and the IVol discount.

Item Type:	Article
Official URL:	https://academic.oup.com/raps
Additional Information:	© 2023 The Authors
Divisions:	Finance
Subjects:	H Social Sciences > HG Finance
JEL classification:	G - Financial Economics > G1 - General Financial Markets > G12 - Asset Pricing; Trading volume; Bond Interest Rates G - Financial Economics > G1 - General Financial Markets > G13 - Contingent Pricing; Futures Pricing
Date Deposited:	21 Nov 2023 11:51
Last Modified:	12 Dec 2024 03:57
URI:	http://eprints.lse.ac.uk/id/eprint/120814

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