Idiosyncratic Volatility and the Cross-Section of Stock Returns of NEEQ Select

Abstract

This paper investigates the empirical relationship between idiosyncratic volatility and the cross-section of stock returns of NEEQ Select. It finds that idiosyncratic volatility is positively related to expected stock returns, with no presence of idiosyncratic volatility anomalies. Idiosyncratic volatility serves as an important asset pricing factor of NEEQ Select, which better represents investors’ psychological expectation of idiosyncratic risk premium. Both expected and unexpected idiosyncratic volatility display a positive and robust relationship to stock returns, but unexpected idiosyncratic risk, which controls for unexpected returns, may exert relatively greater marginal effects. Based on the above conclusions, some suggestions are put forward to actively achieve the diversification management efficiency of NEEQ Select portfolios.