Stock Price Information Content, Idiosyncratic Volatility and Expected Return

Abstract

How idiosyncratic risks are priced in capital asset is always concerned in the financial sector. This paper theoretically analyzes the impact of idiosyncratic volatility on the expected return from the perspective of stock price’s information content, and use Chinese A-share market data, from 1994 to 2013, to do the empirical test. It finds that, if other conditions remain unchanged, when the degree of stock price information content is low, idiosyncratic volatility and expected return are negatively correlated; when the degree of stock price information content is rich, idiosyncratic volatility and expected return are positively correlated. After taking the impact of different regression methods and time spans into consideration, the conclusions are still valid, which indicates that the conclusions are robust. The reason for the above phenomenon is that idiosyncratic volatility is mainly driven by noise or information, which has different impacts on expected return.