Is information risk priced? Evidence from abnormal idiosyncratic volatility

Yung Chiang Yang, Bohui Zhang, Chu Zhang

Research output: Contribution to journalArticlepeer-review

3 Citations (Scopus)

Abstract

We propose a new, price-based measure of information risk called abnormal idiosyncratic volatility (AIV) that captures information asymmetry faced by uninformed investors. AIV is the idiosyncratic volatility prior to information events in excess of normal levels. Using earnings announcements as information events, we show that AIV is positively associated with informed return run-ups, abnormal insider trading, short selling, and institutional trading during pre-earnings-announcement periods. We find that stocks with high AIV earn economically and statistically larger future returns than stocks with low AIV. Taken together, our findings support the notion that information risk is priced.
Original languageEnglish
Pages (from-to)528-554
Number of pages27
JournalJournal of Financial Economics
Volume135
Issue number2
DOIs
Publication statusPublished - Feb 2020
Externally publishedYes

Keywords

  • Information risk
  • Idiosyncratic volatility
  • Earnings announcement
  • Expected returns

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