Serguey Khovansky; Zhylyevskyy, Oleksandr

Proceedings of the 2012 Midwest Finance Association Annual Meeting, Grand Valley State University, January 2012

We apply a new econometric method -- the generalized method of moments under a common shock -- to estimate idiosyncratic volatility premium and average idiosyncratic stock volatility. In contrast to the popular two-pass estimation approach of Fama and MacBeth (1973), the method requires using only a cross-section of return observations. We apply it to cross-sections of weekly U.S. stock returns in January and October 2008 and fi…nd that during these months, the idiosyncratic volatility premium is nearly always negative and statistically signi…cant. The results also indicate that the average idiosyncratic stock volatility increased by at least 50% between January and October.

JEL Classification: C21, C51, G12

Keywords: Generalized method of moments, Idiosyncratic volatility, Cross-section of stock returns, Idiosyncratic volatility premium

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