Review of Quantitative Finance and Accounting

, Volume 52, Issue 2, pp 381–401 | Cite as

Idiosyncratic volatility puzzle: influence of macro-finance factors

  • Nektarios Aslanidis
  • Charlotte ChristiansenEmail author
  • Neophytos Lambertides
  • Christos S. Savva
Original Research


We analyze the cross-sectional relation between expected idiosyncratic volatility and stock returns. The expected idiosyncratic volatility is conditioned on macro-finance factors as well as traditional asset pricing factors. The macro-finance factors are constructed from a large set of macroeconomic and financial variables. Our results show that the negative relation between expected idiosyncratic volatility and stock returns reverses to a positive one when accounting for the macro-finance effects. Portfolio analysis shows that the positive relation is economically important. The relation between expected idiosyncratic volatility and returns is not affected by business cycle variations. The empirical results are highly robust.


Idiosyncratic volatility puzzle Macro-finance factors Business cycle 

JEL Classification

G12 G14 



The authors are grateful for helpful comments from an anonymous referee as well as from seminar participants at Rady School of Management, University of California San Diego and at the Conference on Computational and Financial Econometrics (CFE 2015) in London. Aslanidis acknowledges support from the Spanish Ministry of Science and Innovation project grant (Reference No. ECO2013-42884-P). Christiansen acknowledges support from CREATES funded by the Danish National Research Foundation (DNRF78) and from the Danish Council for Independent Research, Social Sciences (DFF – 4003-00022).


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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department d’Economia, CREIPUniversitat Rovira i VirgiliReus, CataloniaSpain
  2. 2.CREATES, Department of Economics and Business Economics, School of Business and Social SciencesAarhus UniversityAarhus VDenmark
  3. 3.Lund UniversityLundSweden
  4. 4.Department of Commerce, Finance and ShippingCyprus University of TechnologyLimassolCyprus

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