TY - JOUR T1 - What’s IVol Got to Do With It? JF - The Journal of Investing SP - 20 LP - 32 DO - 10.3905/joi.2010.19.3.020 VL - 19 IS - 3 AU - S. Ramu Thiagarajan AU - Yanping Li Y1 - 2010/08/31 UR - https://pm-research.com/content/19/3/20.abstract N2 - Campbell et al.’s [2001] influential paper on idiosyncratic volatility has received a lot of research attention in recent years. The critical question for portfolio managers is: “How does idiosyncratic volatility affect stock selection and asset allocation signals?” This article examines that important question. Using well-accepted metrics of idiosyncratic volatility, the authors find that the effectiveness of both the momentum and the valuation signals critically depends on cross-sectional differences in idiosyncratic volatility. In particular, they find that the mean reversion signal works better for firms with low idiosyncratic volatility, whereas the momentum signal works better for those with high idiosyncratic volatility. This result is robust across different regimes of idiosyncratic volatility. Finally, the authors test whether a measure of idiosyncratic volatility has an impact on the Fed Model for asset allocation. They find that conditioning the signal in the Fed Model for cross-sectional differences in idiosyncratic volatility significantly improves the mean reversion effect that underlies the Fed Model. In summary, they note that it is important to condition stock selection and asset allocation models for cross-sectional differences in idiosyncratic volatility.TOPICS: Volatility measures, portfolio theory, security analysis and valuation ER -