Does idiosyncratic volatility improve the explanation of the returnable prices?

Abstract

The objective of this paper was to investigate if idiosyncratic volatility could be able to improve the explanation of the returnable prices. For this, the CAPM model of Fama & French was used, and based on works such as Ang et al. (2006) and Leite et al. (2016), the volatility fator was included. The difference of this work is the inclusion of portfolio volatility as well as in the calculation of this one that was obtained using the GJR-GARCH model. The study scope was the Brazilian capital market, between 2007 and 2017. The empirical results showed that the inclusion of volatility improves the explanation of the CAPM model Fama & French, fact evidenced by the sensible increase of adjusted R² of the regressions. In addition, it was noted that volatility, when significant, had an opposite relationship with return. When comparated, idiosyncratic volatility was further explained as explaining returns compared to market volatility, which indicates that the information on the montage of portfolios and their oscillations of individual returns seem to be more relevant than market movement, a result that becomes relevant both for hedging and for the search for maximization of returns by investors.