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Does idiosyncratic return volatility capture information or noise

Antonio Cerqueira , Claudia Pereira

ISLA — Instituto Politécnico de Gestão e Tecnologia

International Journal of Trade and Global Markets, 2018

This paper examines the cross-sectional association between earnings quality and firm-specific return volatility for a sample of UK firms listed in the London Stock Exchange. Identifying the determinants of idiosyncratic volatility has been a topical issue since the Campbell et al. (2001) study which documents a noticeable increase in average firm-level volatility across time. Using panel data, we find that poor information environments resulting from poor earnings quality are associated with higher firm-specific return volatility. This finding is consistent with the noise-based approach of firm-specific return volatility. In addition, we provide empirical evidence that such association becomes stronger after combining accruals quality and the dispersion in analysts' forecasts to describe a poor information environment. These findings are likely to contribute to the debate on whether firm-specific return volatility captures more firm-specific information being impounded in stock prices or essentially reflects noise.

Keywords

#idiosyncratic volatility #Earnings quality #noise trading #information environment #accruals quality #analyst forecast dispersion #firm-specific information #stock price volatility #UK listed companies #Volatility (finance) #Accrual #Earnings #Econometrics #Economics #Stock (firearms) #Volatility swap

Bibliographic Details

Publication Type Journal article

Publication Year 2018

Journal / Conference / Work International Journal of Trade and Global Markets

Quartile (SCImago) Q1

Scopus Indexing Indexed source (via SCImago)

ISLA Authors & Affiliations

Does idiosyncratic return volatility capture information or noise

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Bibliographic Details

ISLA Authors & Affiliations