Journal of Financial and Quantitative Analysis Vol. 49 No. 1 2014
On the Relation between EGARCH Idiosyncratic Volatility and Expected Stock Returns
Abstract
A spurious positive relation between exponential generalized autoregressive conditional heteroskedasticity (EGARCH) estimates of expected month t idiosyncratic volatility and month t stock returns arises when the month t return is included in estimation of model parameters. We illustrate via simulations that this look-ahead bias is problematic for empirically observed degrees of stock return skewness and typical monthly return time series lengths. Moreover, the empirical idiosyncratic risk-return relation becomes negligible when expected month t idiosyncratic volatility is estimated using returns only up to month t − 1.
- DOI
- 10.1017/s0022109014000027
- Volume
- 49
- Issue
- 1
- Pages
- 271-296
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref