The Idiosyncratic Volatility Puzzle: Further Evidence from the European Equity Market

Sammanfattning: We do not find clear evidence of an idiosyncratic volatility puzzle on the three markets. Our models are inconclusive with a negative risk premium for the time series portfolio based regression model while the premium is positive in the panel data model. However, the parameter estimates are insignificant, therefore we accept the predictions of modern portfolio theories and conclude that idiosyncratic risk is not priced. We cannot find support that the “idiosyncratic volatility – future return”-relation is different over bear and bull markets. Neither do market volatility shocks seem to explain the difference in return between stocks with high and low idiosyncratic volatility