Abstract
This study investigates the effect of firm-specific news on the pricing of idiosyncratic volatility (IVOL) in China. Using a sample of non-financial A-share listed firms from January 2006 to June 2018, we find that the predictive ability of IVOL is much weaker around firm announcements compared to that without news, suggesting that the limited arbitrage cannot disentangle the IVOL puzzle completely in the emerging market. Additionally, we investigate the effect of news sentiment on the predictive ability of IVOL and find that it is much stronger following bad news compared to good news. Finally, when we include the macroeconomic variables known to predict returns to adjust the systematic risk, we obtain novel findings that the negative premium of IVOL becomes insignificant, suggesting that the negative premium is time-varying with macroeconomy.
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