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Idiosyncratic volatility and nominal stock prices: evidence from approximate factor structures

Author

Listed:
  • Patrick Roger

    (LARGE - Laboratoire de recherche en gestion et économie - Université Louis Pasteur - Strasbourg I - Université Robert Schuman - Strasbourg III)

  • Tristan Roger

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique)

  • Alain Schatt

    (UNIL - Université de Lausanne = University of Lausanne)

Abstract

Approximate factor structures defined by Chamberlain and Rotschild (1983) allow to test whether a given quantitative firm characteristic (the nominal stock price in this paper) is a determinant of the idiosyncratic volatility of stock returns. Our study of 8,000 U.S stocks over the period 1980-2014 shows that small price stocks exhibit a higher idiosyncratic volatility than large price stocks. This relationship is persistent over time and robust to variations in the number of common factors of the approximate factor structure. Moreover, this small price effect does not hide a small-firm effect because it is still valid when we analyze the tercile of large firms. Our result confirms that small price stocks have lottery-type characteristics and, therefore, it is not in line with the efficient market hypothesis.

Suggested Citation

  • Patrick Roger & Tristan Roger & Alain Schatt, 2017. "Idiosyncratic volatility and nominal stock prices: evidence from approximate factor structures," Post-Print hal-02303555, HAL.
    • Handle: RePEc:hal:journl:hal-02303555
    DOI: 10.20870/fb.2017.1.1.1853
    as

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