טכניון מכון טכנולוגי לישראל
הטכניון מכון טכנולוגי לישראל - בית הספר ללימודי מוסמכים  
M.Sc Thesis
M.Sc StudentChen Nir-Itai
SubjectIdiosyncratic Volatility; Stock Returns; and Priming
Processes: Empirical and Experimental Research
DepartmentDepartment of Industrial Engineering and Management
Supervisor Professor Doron Kliger
Full Thesis textFull thesis text - English Version


Abstract

There is an ongoing debate in the literature on the effect of idiosyncratic volatility on future stock returns, and what stands behind this effect. We contribute to this debate by providing evidence on documenting the relationship between idiosyncratic volatility and future returns as a function of changes in the VIX. Specifically, months associated with increasing (decreasing) VIX are followed by a positive (negative) relationship between idiosyncratic volatility and future returns. In other words, when the VIX increase, idiosyncratic volatility positively affects stocks’ return and vice versa. When taking into account risk factors, we find that the VIX also explains part of the relationship between idiosyncratic volatility and average return. We explain this phenomenon through priming process, which is a behavioral procedure that affects investors' decisions. We believe that because the VIX mirrors investor’s sentiment, increase in the VIX trigger a priming process which causes investors to be more risk-averse, and thus require more compensation for taking risks.