I calculate monthly idiosyncratic volatility as the standard deviation of residuals of a Fama-French regression on daily returns.

Now assume that within these daily returns there is a price hike due to an overreaction of the market. Does this automatically lead to a higher IVOL because the price is irrational and not due to systematic risk factors?

  • $\begingroup$ Do you assume a single short-term event within your FF regression (e.g. the announcement of share repurchases, stock splits,...) or do you think of a long-term persistent overreaction and therefore a permanent misvaluation (starting within a single point of time in the estimation window)? $\endgroup$ – skoestlmeier Oct 4 '18 at 12:47

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Browse other questions tagged or ask your own question.