Abnormal Idiosyncratic Volatility as a Measure of Information Risk
Summary
The document explains abnormal idiosyncratic volatility (AIV), a price based measure of information risk around earnings announcements. It compares each stock’s residual volatility during the five trading days before earnings announcements with its residual volatility during other periods. The difference is recalculated monthly using a trailing year of daily returns, after removing market, size, and value factor effects from returns.
The cited study reports that higher AIV is associated with stronger pre announcement returns and unusual trading by insiders, short sellers, and institutions. It also finds a positive relationship between AIV and future stock returns in portfolio sorts and Fama MacBeth regressions. The reported effect persists after controls for other factors and alternative information risk measures, and across market capitalization samples and announcement windows.
AIV is noisy: negative values can arise from volatility during other company events or noise trading, and the measure is not persistent. The evidence comes from US equities over 1972–2015, so the results do not establish that the premium generalizes to other markets or periods.
Key ideas
- AIV is the difference between residual volatility before earnings announcements and during non announcement periods.
- Higher AIV is associated with pre announcement returns and unusual trading by insiders, short sellers, and institutions.
- The cited study finds that AIV predicts future returns after controlling for several established factors and alternative information risk measures.
- Negative AIV values may reflect other sources of volatility and do not imply the measure is free of noise.
- The reported evidence comes from historical US equity data and may not generalize to other markets or periods.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.