Abstract
This paper analyses the effects of news on the so-called ‘idiosyncratic volatility puzzle’. By empirically modelling the stock return data from the Center for Research in Security Prices (CRSP) database from 2000 to 2011, we firstly find that idiosyncratic volatility has a positive effect on excess return. Existing studies suggest that both the quantity and quality of public information arrival (news flow) can significantly induce the stock return volatility. Following this idea, we employ various models to control for the potential news effects on the idiosyncratic volatility and re-visit this puzzle. Our empirical results suggest that when quantity, relevance and quality of news are all properly controlled for, the average magnitude of the idiosyncratic volatility effect on excess return can be reduced by roughly 50 per cent.
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