Size-portfolio Idiosyncratic Volatility with Aggregate Return, Cross-Sectional Return, and GDP Growth: U.S. and International Evidence-Sectional Return, and GDP Growth: U.S. and International Evidence

Size-portfolio Idiosyncratic Volatility with Aggregate Return, Cross-Sectional Return, and GDP Growth: U.S. and International Evidence-Sectional Return, and GDP Growth: U.S. and International Evidence

Chris Kuo

Abstract

Firm size is an essential factor in examining the relation between returns and idiosyncratic volatilities. This paper documents that, when the idiosyncratic volatility is specified by firm size, the size-portfolio idiosyncratic volatility is statistically significant in explaining the future aggregate return. This property prevails for the equally- or value-weighted scheme, the different time periods in the U.S. market, or the international markets. This paper also examines the relation between size-portfolio idiosyncratic volatilities and future cross-sectional returns. The size-portfolio idiosyncratic volatilities are also significantly related to future cross-sectional returns for both the U.S. and international markets. Finally, this paper examines the predictive ability of the size-portfolio idiosyncratic volatility for GDP growth. It concludes that size-portfolio idiosyncratic volatility contain significant information for forecasting future GDP growth for both the U.S. and the international markets.

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