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Corporate hedging and the high idiosyncratic volatility low return puzzle

Chng, Michael T., Fang, Victor, Xiang, Vincent and Zhang, Hong Feng 2017, Corporate hedging and the high idiosyncratic volatility low return puzzle, International review of finance, pp. 1-31, doi: 10.1111/irfi.12109.

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Title Corporate hedging and the high idiosyncratic volatility low return puzzle
Author(s) Chng, Michael T.
Fang, Victor
Xiang, Vincent
Zhang, Hong FengORCID iD for Zhang, Hong Feng orcid.org/0000-0001-9017-9646
Journal name International review of finance
Start page 1
End page 31
Total pages 31
Publisher Wiley-Blackwell
Place of publication London, Eng.
Publication date 2017
ISSN 1369-412X
Summary The literature offers various explanations to either support or refute the Ang et al. (2006) high idiosyncratic volatility low return puzzle. Fu (2009) finds a significantly positive contemporaneous relation between return and exponential generalized autoregressive conditional heteroskedastic idiosyncratic volatility. We use corporate hedging to shed light on this puzzle. Conceptually, idiosyncratic volatility matters to investors who face limits to diversification. But limits to diversification become less relevant for firms that consistently hedge. We confirm the main finding in Fu (2009), but only for firms that do not consistently hedge. For firms that adopt a consistent hedging policy, idiosyncratic volatility, whether contemporaneous or lagged, is insignificant in Fama–MacBeth regressions, controlling for size, book-to-market, momentum, liquidity, and industry effects.
Notes In Press
Language eng
DOI 10.1111/irfi.12109
Field of Research 150201 Finance
1502 Banking, Finance And Investment
Socio Economic Objective 970114 Expanding Knowledge in Economics
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2017, International Review of Finance
Persistent URL http://hdl.handle.net/10536/DRO/DU:30091230

Document type: Journal Article
Collection: Department of Finance
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