Price informativeness: a potential explanation for the idiosyncratic volatility puzzle.

Price informativeness is the amount of private information incorporated into stock prices and measured by R 2 from regressions of stock returns on systematic risk factors. While R 2 is closely related with idiosyncratic volatility, it is not interchangeable because magnitude of systematic volatility simultaneously changes. By controlling for the systematic volatility using the double-sorting portfolio approach, we suggest a potential involvement of price informativeness with the idiosyncratic volatility puzzle. Both cross-sectional evidence of monotonic and inverse relationship between idiosyncratic volatility and R 2 and time-series evidence of disappearing alphas of the low-minus-high idiosyncratic volatility portfolios during recessions support an explanation of the idiosyncratic volatility puzzle in association with price informativeness. [ABSTRACT FROM AUTHOR]