Critical Finance Review > Vol 12 > Issue 1-4

The Fu (2009) Positive Relation Between Idiosyncratic Volatility and Expected Returns is Due to Look-Ahead Bias

Seongkyu Gilbert Park, Atkinson Graduate School of Management, Willamette University, USA, gpark@willamette.edu , K. C. John Wei, School of Accounting and Finance, Hong Kong Polytechnic University, Hong Kong, john.wei@polyu.edu.hk , Linti Zhang, School of Accounting and Finance, Hong Kong Polytechnic University, Hong Kong, linti1002.zhang@polyu.edu.hk
 
Suggested Citation
Seongkyu Gilbert Park, K. C. John Wei and Linti Zhang (2023), "The Fu (2009) Positive Relation Between Idiosyncratic Volatility and Expected Returns is Due to Look-Ahead Bias", Critical Finance Review: Vol. 12: No. 1-4, pp 57-124. http://dx.doi.org/10.1561/104.00000126

Publication Date: 08 Aug 2023
© 2023 Seongkyu Gilbert Park, K. C. John Wei and Linti Zhang
 
Subjects
 
Keywords
G10, G12
Idiosyncratic volatility, Look-ahead bias, EGARCH
 

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In this article:
1. Introduction 
2. Empirical Analysis 
3. Conclusion 
References 

Abstract

Expected idiosyncratic volatility (IVOL) and its positive relation to expected returns of Fu (2009) can be closely replicated, but only when we include information up to time t to estimate the IVOL at time t. Since this involves look-ahead bias, we re-estimate expected IVOL using information only up to time t−1. We find no significant relation between IVOL and returns, and our results are robust to the sample periods extended to before and after that of Fu (2009). Our findings are consistent with the fact that idiosyncratic risk is not priced.

DOI:10.1561/104.00000126

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