Stochastic idiosyncratic cash flow risk and real options: Implications for stock returns

• 成果类型: Article
• 署名作者: Bhamra, Harjoat S.; Shim, Kyung Hwan
• 署名单位: Imperial College London; University of New South Wales Sydney; University of New South Wales Sydney
• 刊物名称: JOURNAL OF ECONOMIC THEORY
• ISSN/ISSBN: 0022-0531
• DOI: 10.1016/j.jet.2016.11.005
• 发表日期: 2017
• 页码: 400-431
• 关键词: Asset pricing; Stock return and idiosyncratic volatility; Real options; stochastic volatility; regime-switching; Mixed jump-diffusion

摘要

Stocks with high idiosyncratic volatility perform poorly relative to low idiosyncratic volatility stocks. We offer a novel explanation of this anomaly based on real options, which is consistent with earlier findings on idiosyncratic volatility (the positive contemporaneous relation between firm-level stock returns and idiosyncratic volatility). Our approach is based on introducing stochastic idiosyncratic cash flow risk into an equity valuation model of firms with growth options. Within our model, a firm's systematic risk depends on the delta of its growth option. The growth option's delta is lower when idiosyncratic volatility rises, driving down the firm's systematic risk and hence its expected return firms with higher idiosyncratic volatility therefore have lower expected returns. Our model additionally offers the following novel empirical predictions: (i) returns correlate positively with idiosyncratic volatility during intervals between large changes in idiosyncratic volatility (the switch effect), and (ii) the anomalies and the switch effect are stronger for firms with more real options and which undergo larger changes in idiosyncratic volatility. Empirical results support the predictions of our model. (C) 2017 Elsevier Inc. All rights reserved.