Idiosyncratic Risk, Range-based volatility, Expected volatility, Risk-return relationship.


Volatility is a key input into many important financial decisions. Therefore, accurateforecast of volatility plays animportant role in making these decisions. Typically, volatility is forecast using realized volatility computed from closing stock prices. Employing expectation of volatilitiessuch calculated, several papers find that expected idiosyncratic risk is positively associated with contemporaneous returns. Yang and Zhang [2000] show that estimators belonging to the class of range-based estimators are more efficient than the estimators derived only from closing prices. Using the more efficient range-based volatility estimates, we find no evidence to support the hypothesis that idiosyncratic risk explains returns.