Stock Returns After Idiosyncratic Volatility Spikes
September 9, 2016 - Sentiment Indicators, Volatility Effects
Should investors buy or sell stocks experiencing unique (idiosyncratic) volatility spikes? In their August 2016 paper entitled “Unusual News Flow and the Cross-Section of Stock Returns”, Turan Bali, Andriy Bodnaruk, Anna Scherbina and Yi Tang investigate relationships among sudden increases in stock idiosyncratic volatility, unusual firm news, changes in analyst earnings forecast dispersion, short selling and future returns. They identify idiosyncratic volatility shocks as large deviations from the volatility predicted out-of-sample by a regression model that accounts for market, size and book-to-market effects. They identify unusual news flow using Thomson-Reuters News Analytics data (covering 41 media) by comparing the number of stories about a firm in the current month to the average monthly coverage the prior four months, measured overall and separately for positive, negative and neutral stories. They measure changes in analyst earnings forecast dispersion (standard deviation divided by mean) based on data from I/B/E/S as the difference between current dispersion and dispersion two months ago. They measure data on shorting demand and utilization (shares borrowed divided by shares available for lending) using data from Markit. Using monthly values of the specified data from various inceptions through December 2012, they find that: Keep Reading