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Volatility risk and stock return predictability on global financial crises

Worawuth Kongsilp (Department of Accounting and Finance, University of Greenwich, London, UK)
Cesario Mateus (Department of Accounting and Finance, University of Greenwich, London, UK)

China Finance Review International

ISSN: 2044-1398

Article publication date: 20 February 2017

3063

Abstract

Purpose

The purpose of this paper is to investigate the role of volatility risk on stock return predictability specified on two global financial crises: the dot-com bubble and recent financial crisis.

Design/methodology/approach

Using a broad sample of stock options traded on the American Stock Exchange and the Chicago Board Options Exchange from January 2001 to December 2010, the effect of different idiosyncratic volatility forecasting measures are examined on future stock returns in four different periods (Bear and Bull markets).

Findings

First, the authors find clear and robust empirical evidence that the implied idiosyncratic volatility is the best stock return predictor for every sub-period both in Bear and Bull markets. Second, the cross-section firm-specific characteristics are important when it comes to stock returns forecasts, as the latter have mixed positive and negative effects on Bear and Bull markets. Third, the authors provide evidence that short selling constraints impact negatively on stock returns for only a Bull market and that liquidity is meaningless for both Bear and Bull markets after the recent financial crisis.

Practical implications

These results would be helpful to disclose more information on the best idiosyncratic volatility measure to be implemented in global financial crises.

Originality/value

This study empirically analyses the effect of different idiosyncratic volatility measures for a period that involves both the dotcom bubble and the recent financial crisis in four different periods (Bear and Bull markets) and contributes the existing literature on volatility measures, volatility risk and stock return predictability in global financial crises.

Keywords

Citation

Kongsilp, W. and Mateus, C. (2017), "Volatility risk and stock return predictability on global financial crises", China Finance Review International, Vol. 7 No. 1, pp. 33-66. https://doi.org/10.1108/CFRI-04-2016-0021

Publisher

:

Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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