I find the low volatility anomaly is present in all but the smallest of stocks. Portfolios can be formed on either total or idiosyncratic volatility to take advantage of this anomaly, but I show measures of idiosyncratic volatility are key. Standard risk-adjusted returns suggest that there is no low volatility anomaly from 1996 through 2011, but I find this result arises from model misspecification. Caution must be taken when analyzing high volatility stocks because their returns have a nonlinear relationship with momentum during market bubbles. I then find that mutual funds with low return volatility in the prior year outperform those with high return volatility by about 5.4% during the next year. After controlling for heterogeneity in fund characteristics, I show that a one standard deviation decrease in fund volatility in the prior year predicts an increase in alpha of about 2.5% in the following year. My evidence suggests that this difference in performance is not due to manager skill but is instead caused by the low volatility anomaly. I find no difference in performance or skill between low and high volatility mutual funds after accounting for the returns on low and high volatility stocks.

This thesis examines the return volatility of Hong Kong stock market on the firm-level, industry-level, and market-level during a fifteen year sample period between 1991 and 2005. The identified patterns of stock return volatilities contribute to the understanding of an important Asian market.

Thesis (Ph. D.)--Michigan State University. Dept. of Biochemistry and Molecular Biology, 2008. / Title from PDF t.p. (viewed on Mar. 30, 2009). Includes bibliographical references (p. 204-227). Also issued in print.

Chapter 1- How well-off or worse-off a country can be by joining a currency union in the presence of structural heterogeneity and idiosyncratic shocks? In light of the proposed creation of a currency union for the Economic Community of the West African States (ECOWAS), we develop a three-region DSGE model to explore the question. We divide the ECOWAS into three regions-Nigeria, the existing WAEMU (West-African Economic Monetary Union), and the rest. Considering two monetary regimes (monetary union and monetary independence), we assess the heterogeneity in the responses to country-specific productivity and terms-of-trade shocks in these two regimes, as well as the costs related to the loss of monetary independence. Our results indicate that shocks hitting a given region generate cross-border spillover effects, whose sign and magnitude depend not only on the nature of the disturbance but also on its origin and on the monetary policy regime considered. Moreover, the propagation of shocks across regions is magnified under the monetary union regime. Shocks hitting Nigeria's economy tend to have a more destabilizing effect on the other regions, especially when they are inside the union. Our results also suggest that the proposed monetary union for the ECOWAS region can potentially lead to welfare improvement for all the members, but the magnitude of the welfare gain is relatively small. Chapter 2- In this chapter, we develop a multi-region New-Keynesian Dynamic Stochastic General Equilibrium (DSGE) of the West-African countries to provide a quantitative analysis of intergovernmental fiscal transfers in the context of the proposed creation of a monetary union. We assess the potential role of fiscal transfers in the stabilization of business cycle fluctuations in the projected monetary union in the presence of idiosyncratic shocks. Starting from a baseline scenario with no fiscal transfers among the regions, we analyze the dynamic and welfare impacts of full and partial fiscal equalization schemes with nominal tax revenue sharing within the union. We consider adverse productivity and term-of-trade shocks. Our simulation results suggest that the transfer mechanism is an efficient stabilizing tool. However, the stabilization property of the fiscal transfer system hinges upon the full or partial nature of the compensation system. Moreover, the ability of the transfer system to absorb the negative effects of idiosyncratic shocks depends not only on the type of shock but also on the size of the region directly affected. Chapter 3- We analyze in this chapter the macroeconomics effects of fiscal policy shocks in the Economic Community of West African States (ECOWAS). To that end, we use a Global Vector Autoregression (GVAR) model, which allows us to assess both the within country and the cross borders spillover effects of the fiscal shocks. For the dynamic analysis, we consider negative country-specific public spending and revenue shocks affecting Nigeria as well as regional public spending and revenue shocks affecting two groups of countries in the area, namely the West African Economic and Monetary Union (WAEMU) and the Rest of ECOWAS (RECOWAS). We provide evidence of considerable cross-country heterogeneity in fiscal spillovers; for instance, spillovers are high for fiscal shocks affecting Nigeria, while the cross-border spillover effects on Nigeria are weak for shocks affecting WAEMU and RECOWAS. Our results also suggest that fiscal policy is very relevant in stimulating real output in each of the ECOWAS countries but limited for the cross-country output stimulation.

This dissertation consists of two chapters. The first chapter examines the role of growth options on stock return continuation. Growth options are both difficult to value and risky. Daniel, Hirshleifer and Subrahmanyam (1998) argue that higher momentum profits earned by high market-to-book firms stem from investors' higher overconfidence due to the difficulty of valuing growth options. Johnson (2002) and Sagi and Seasholes (2007) offer an alternative rational explanation wherein growth options cause a wider spread in risk and expected returns between winners and losers. This paper suggests that firm-specific uncertainty helps disentangle these two different explanations. Specifically, the rational explanation is at work among firms with low firm specific uncertainty. However, the evidence is in favor of the behavioral explanation for firms with high firm specific uncertainty. This is consistent with the notion that investors are more prone to behavioral biases in the presence of firm-specific uncertainty and the resulting mispricings are less likely to be arbitraged away. The second chapter examines how investors capitalize differences of opinion when disagreements are common knowledge. We conduct an event study of the market's reaction to analysts' dispersed earnings forecast revisions. We find that investors take differences of opinion into account and do not exhibit an optimism bias. Our findings indicate that the overpricing of stocks with high forecast dispersion is not due to investors' tendency to overweight optimistic expectations, but rather due to investor credulity regarding analysts' incentives. Our findings support the notion that assets may become mispriced when rational investors face structural uncertainties as proposed by Brav and Heaton (2002). / Ph. D.

The human hand, in building as in art, has left its impression on all the earliest forms of architecture. Its mark has been one of imperfection, variation, and uniqueness, and with these traits the personification of something innately human. This character, instilled into any work, immortalizes the idiosyncrasies descriptive of its creator. Rather than viewed as anachronism, inculcating the human component, "manufactum", into modern design reacquaints us with our own capricious temperaments. As powerful tools of the contemporary world heighten our faculty for exactitude, the prudence remains as to whether and when it is appropriate to do so. / Master of Architecture

Submitted by Cristina Tessari (tinatessari@gmail.com) on 2016-06-09T13:51:42Z No. of bitstreams: 1 DissertationEPGE_CristinaTessari2016.pdf: 1264081 bytes, checksum: 14e65157457bfe8deea5353bb192a0af (MD5) / Approved for entry into archive by Marcia Bacha (marcia.bacha@fgv.br) on 2016-06-29T14:03:25Z (GMT) No. of bitstreams: 1 DissertationEPGE_CristinaTessari2016.pdf: 1264081 bytes, checksum: 14e65157457bfe8deea5353bb192a0af (MD5) / Approved for entry into archive by Marcia Bacha (marcia.bacha@fgv.br) on 2016-06-29T14:06:59Z (GMT) No. of bitstreams: 1 DissertationEPGE_CristinaTessari2016.pdf: 1264081 bytes, checksum: 14e65157457bfe8deea5353bb192a0af (MD5) / Made available in DSpace on 2016-06-29T14:07:23Z (GMT). No. of bitstreams: 1 DissertationEPGE_CristinaTessari2016.pdf: 1264081 bytes, checksum: 14e65157457bfe8deea5353bb192a0af (MD5) Previous issue date: 2016-03-22 / We use Brazilian data to compute monthly idiosyncratic moments (expected skewness, realized skewness, and realized volatility) for equity returns and assess whether they are informative for the cross-section of future stock returns. Since there is evidence that lagged skewness alone does not adequately forecast skewness, we estimate a cross-sectional model of expected skewness that uses additional predictive variables. Then, we sort stocks each month according to their idiosyncratic moments, forming quintile portfolios. We find a negative relationship between higher idiosyncratic moments and next-month stock returns. The trading strategy that sells stocks in the top quintile of expected skewness and buys stocks in the bottom quintile generates a significant monthly return of about 120 basis points. Our results are robust across sample periods, portfolio weightings, and to Fama and French (1993)’s risk adjustment factors. Finally, we identify a return reversal of stocks with high idiosyncratic skewness. Specifically, stocks with high idiosyncratic skewness have high contemporaneous returns. That tends to reverse, resulting in negative abnormal returns in the following month. / In the first chapter, we test some stochastic volatility models using options on the S&P 500 index. First, we demonstrate the presence of a short time-scale, on the order of days, and a long time-scale, on the order of months, in the S&P 500 volatility process using the empirical structure function, or variogram. This result is consistent with findings of previous studies. The main contribution of our paper is to estimate the two time-scales in the volatility process simultaneously by using nonlinear weighted least-squares technique. To test the statistical significance of the rates of mean-reversion, we bootstrap pairs of residuals using the circular block bootstrap of Politis and Romano (1992). We choose the block-length according to the automatic procedure of Politis and White (2004). After that, we calculate a first-order correction to the Black-Scholes prices using three different first-order corrections: (i) a fast time scale correction; (ii) a slow time scale correction; and (iii) a multiscale (fast and slow) correction. To test the ability of our model to price options, we simulate options prices using five different specifications for the rates or mean-reversion. We did not find any evidence that these asymptotic models perform better, in terms of RMSE, than the Black-Scholes model. In the second chapter, we use Brazilian data to compute monthly idiosyncratic moments (expected skewness, realized skewness, and realized volatility) for equity returns and assess whether they are informative for the cross-section of future stock returns. Since there is evidence that lagged skewness alone does not adequately forecast skewness, we estimate a cross-sectional model of expected skewness that uses additional predictive variables. Then, we sort stocks each month according to their idiosyncratic moments, forming quintile portfolios. We find a negative relationship between higher idiosyncratic moments and next-month stock returns. The trading strategy that sells stocks in the top quintile of expected skewness and buys stocks in the bottom quintile generates a significant monthly return of about 120 basis points. Our results are robust across sample periods, portfolio weightings, and to Fama and French (1993)’s risk adjustment factors. Finally, we identify a return reversal of stocks with high idiosyncratic skewness. Specifically, stocks with high idiosyncratic skewness have high contemporaneous returns. That tends to reverse, resulting in negative abnormal returns in the following month.

This dissertation consists of three essays. The first essay focuses on idiosyncratic volatility as a primary arbitrage cost for short sellers. Previous studies document (i) negative abnormal returns for high relative short interest (RSI) stocks, and (ii) positive abnormal returns for low RSI stocks. We examine whether these market inefficiencies can be explained by arbitrage limitations, especially firms' idiosyncratic risk. Consistent with limits to arbitrage hypothesis, we document an abnormal return of -1.74% per month for high RSI stocks (>=95th percentile) with high idiosyncratic volatility. However, for similar level of high RSI, abnormal returns are economically and statistically insignificant for stocks with low idiosyncratic volatility. For stocks with low RSI, the returns are positively related to idiosyncratic volatility. These results imply that idiosyncratic risk is a potential reason for the inability of arbitrageurs to extract returns from high and low RSI portfolios. The second essay investigates market efficiency in the absence of limits to arbitrage on short selling. Theoretical predictions and empirical results are ambiguous about the effect of short sale constraints on security prices. Since these constraints cannot be eliminated in equity markets, we use trades from futures markets where there is no distinction between short and long positions. With no external constraints on short positions, we document a weekend effect in futures markets which is a result of asymmetric risk between long and short positions around weekends. The premium is higher in periods of high volatility when short sellers are unwilling to accept higher levels of risk. On the other hand, riskiness of long positions does not seem to have a similar impact on prices. The third essay studies investor behaviors that generate mispricing by examining relationship between stock price and future returns. Based on traditional finance theory, valuation should not depend on nominal stock prices. However, recent literature documents that preference of retail investors for low price stocks results in their overvaluation. Motivated by this preference, we re-examine the relationship between stock price and expected return for the entire U.S. stock market. We find that stock price and expected returns are positively related if price is not confounded with size. Results in this paper show that, controlled for size, high price stocks significantly outperform low price stocks by an abnormal 0.40% per month. This return premium is attributed to individual investors' preference for low price stocks. Consistent with costly arbitrage, the return differential between high and low price stocks is highest for the stocks which are difficulty to arbitrage. The results are robust to price cut-off of $5, and in different sub-periods. / Ph. D.

In this thesis, we explore the hidden risks in a firm’s real operating process and the financial adjustments made as the risk changes. We investigate the risks associated with a firm’s vertical channel (chapter 2 and 3) and geographic location (chapter 4), and analyze what financial consequences these risks bring. We firstly show strong evidence that a firm’s cost of equity decreases as supplier immobility translates into a decrease in operating leverage and systematic risk. Next, we show that as the specificity of customers induces more cash flow instability, the firm’s idiosyncratic risk increases with customer specificity. As a result, firms with more specific customers choose more conservative dividend payout policies to adjust for the risk changes. In the third essay, we examine the information risk from firm’s geographic location. We find that this information risk affects a firm’s capital structure choice and that centrally located firms have lower leverage ratios than do remotely located ones. / Thesis (Ph.D, Management) -- Queen's University, 2013-04-29 22:12:43.675

Esta pesquisa investigou os efeitos da estrutura de propriedade e da clareza na comunicação entre empresa e mercado sobre o risco idiossincrático das ações negociadas no mercado brasileiro de capitais de 2002 a 2012. O risco idiossincrático(1-R2) foi medida a partir do coeficiente de determinação da regressão dos retornos da ação em relação aos fatores sistemáticos (R2) e reflete o percentual dos retornos da ação não explicados pelos fatores sistemáticos. Neste estudo, empresas com alta concentração acionária são aquelas em que o maior acionista detém mais de 50% do total das ações ou em que os três maiores acionistas detêm, em conjunto, mais de 70% do total das ações. A concentração acionária afeta positivamente a volatilidade idiossincrática, enquanto o porte da empresa e a liquidez do papel na bolsa têm efeito oposto. Foi observada relação positiva entre a concentração acionária e o risco idiossincrático que, por sua vez, é menor nas empresas do setor financeiro, com alta concentração acionária. Contudo, parte do risco idiossincrático observado nas ações das empresas com alta concentração acionária decorre da menor liquidez do papel como consequência da pequena parcela das ações disponível aos investidores, e supostamente não está relacionada à incorporação das informações específicas aos preços. Nas empresas com alta concentração acionária, a volatilidade idiossincrática está positivamente relacionada à rentabilidade reportada e negativamente associada ao endividamento. As oportunidades de crescimento estão positivamente relacionadas com o risco idiossincrático nos casos em que a concentração acionária não é alta. Esse fato é compatível com a suposição de que as divergências sobre o impacto futuro do aproveitamento econômico das oportunidades com as quais a empresa se depara, gerariam variações nos preços decorrentes de informações específicas, corroborando com a suposição de que o risco idiossincrático reflete, ao menos em parte, as informações específicas incorporadas aos preços. Por outro lado, não foram encontradas evidências de que a clareza na comunicação entre a empresa e o mercado tenha efeito significativo na variabilidade dos retornos idiossincráticos. Se as informações específicas são incorporadas aos preços, a incorporação, ao que parece, não se dá pelos mecanismos atuais de fluxo de informação entre empresa e investidores. / This research investigates the effects of the ownership structure and the clarity of firm activities and performance to outsiders with regard to the idiosyncratic volatility of shares traded on the Brazilian stock exchange from 2002 to 2012. The idiosyncratic volatility (1-R²) is based on the coefficient of determination of regression of stock returns in relation to systematic factors (R²), and reflects the percentage of stock returns not explained by these systematic factors. In this study, companies with high stock concentration are those whose largest shareholder holds more than 50% of the total outstanding shares or whose three largest shareholders together hold more than 70% of the total outstanding shares. Ownership concentration positively affects the idiosyncratic volatility, while the firm\'s size and stock liquidity on the stock exchange have an opposite effect. A positive relationship between the ownership concentration and the idiosyncratic volatility is noted, which in turn is lower in financial institutions with high ownership concentration. However, part of the idiosyncratic volatility noted in stocks of firms with high ownership concentration results from lower liquidity of its papers as a consequence of the small number of shares available to investors and supposedly not related to firm-specific information incorporated into stock prices. In firms with high ownership concentration, idiosyncratic volatility is positively related to reported profitability and negatively associated with leverage. Growth opportunities are positively related to idiosyncratic volatility in cases where ownership concentration is not high. This fact is consistent with the assumption that variances of the future impact of the economic use of opportunities faced by a firm would generate variations in in its stock price as a result of specific information, supporting the assumption that the idiosyncratic volatility reflects, at least in part, firm-specific information incorporated into stock prices. On the other hand, no evidence is found that the clarity of firm activities and performance to outsiders has a significant effect on the variability of idiosyncratic returns. If firm-specific information is incorporated into its stock price, the incorporation, it seems, does not occur by current mechanisms of information flow between the firm and investors.