Danielle Xu

Dissecting the Idiosyncratic Volatility Anomaly

The idiosyncratic volatility anomaly, as first documented in Ang, Hodrick, Xing, and Zhang (2006), has received considerable attention in the literature. In this paper, we examine the pervasiveness of the anomaly in various stock samples and provide evidence towards distinguishing potential explanations. Our results show that the idiosyncratic volatility anomaly is a common stock phenomenon. It is rather robust once we exclude microcaps, as defined in Fama and French (2008), or penny stocks (with prices below

What drives stock market growth? A case of a volatile emerging economy

5), or the month of January, corroborating the findings in Doran, Jiang, and Peterson (2010). In addition, we show that the idiosyncratic volatility anomaly is not due to the market microstructure effect and cannot be explained by short-term stock return reversal.

Sell-Side Analysts and Gender: A Comparison of Performance, Behavior, and Career Outcomes

ABSTRACT We study the determinants of the explosive stock market growth and increased foreign portfolio investment in Pakistan. Our results indicate that in contrast to evidence from developed markets, the aggregate stock returns are not driven by macroeconomic fundamentals in Pakistan. Moreover, foreign portfolio investors do not tend to react to changes in economic variables in Pakistan. As fundamentals fail to affect stock returns in Pakistan, they may be based more on speculative motives. Our results suggest that in the absence of a strong institutional and regulatory framework, economic policies have only a limited effect on stabilizing an emerging market.

The Accounting Treatment of Goodwill, Idiosyncratic Risk, and Market Pricing

Using a comprehensive sample of investment recommendations, we investigate differences in the performance, behavior, and career outcomes of male and female sell-side analysts. Compared to their male counterparts, we find that the recommendations of female analysts produce similar abnormal returns but with lower idiosyncratic risks. Further, gender does not seem to negatively influence female analysts’ career outcomes as defined by their star rankings and job mobility among brokerage firms. In fact, being a female analyst seems to increase the likelihood of being listed among the prestigious Institutional Investor and WSJ star analysts.

Institutional Investors and Foreign Exchange Risk

We study the relationship between goodwill and future returns by considering how the information content of goodwill before and after Statement of Financial Accounting Standards (SFAS) 142 affects idiosyncratic return volatility (IVOL). Contrary to expectations, previous research has documented that stocks with high IVOL have low future returns (IVOL anomaly). We build on research that shows that high IVOL is a function of low information on future earnings and define goodwill as a growth option that could be priced through IVOL. Our results show that, during the goodwill amortization period, IVOL is high and the IVOL anomaly is strong. In contrast, nonamortized and tested for impairment goodwill is informative and corrects the IVOL anomaly. We find evidence that SFAS 142’s recognition of goodwill as an asset with indefinite useful life results in value-relevant information about firm growth options and future earnings, thus reducing IVOL, eliminating the IVOL anomaly, and creating an environment of more efficient market pricing of risk.

Measuring Abnormal Bond Performance

We study institutional appetite for stocks with FX exposure, and find variation among institution types. Institutions that are by their nature more likely to engage in active management of foreign exchange risk in their portfolio, namely mutual funds and hedge funds seek stocks with foreign exchange exposure. Institutions that are constrained by regulation tend to avoid foreign exchange exposure.