Three Essays in Stock Return Volatility
Essay one of this dissertation investigates the relation between fundamental idiosyncratic volatility and stock returns idiosyncratic volatility using data from 56 countries over 1980-2014. I find a strong positive relation between fundamental idiosyncratic volatility and idiosyncratic volatility of returns. This association, however, seems to be entirely driven by the developed economies and I find no effect in the emerging markets. Specifically, fundamental idiosyncratic volatility does not lead to more idiosyncratic return volatility in countries with poor legal institutions and weak shareholder protection laws. The second essay examines the effect of accounting standards on return predictability by using a variance decomposition approach, and is joint work with Pierluigi Balduzzi, Gil Sadka, and Ronnie Sadka. We decompose returns into a cash-flow news component and a discount-rate news component, and investigate cross-sectional and time-series changes in the contribution of each component to return variations. We also decompose returns for 20 industries in three subsample periods to examine the effect of accounting standards on different industries over time. Our results contribute to our understanding of the effect of accounting practices on accounting variables and return predictability. The third essay studies the effect of short-selling on stock price informativeness. Morck, Yeung, and Yu (2000), in their pioneering study of international differences in stock price synchronicity, emphasize the effect of market development on the ability of investors to incorporate firm-specific information into prices. I use a unique institutional feature in the Hong Kong market to investigate one of the important tools investors use to incorporate information into prices and hence, reduce stock price synchronicity; short-selling. Examining the cross-sectional and time-series variation in short-sale constraints in the Hong Kong market, I find that following the removal of short-sale constraints, stock prices become more informative and move less in tandem with the market. My findings contribute to our understanding of the impact of short-sales constraints on stock price informativeness.