Imperial College London
Dr Harjoat Bhamra

DrHarjoatBhamra

Business School

Associate Professor of Finance
 
 
 
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Contact

 

+44 (0)20 7594 9077h.bhamra CV

 
 
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Location

 

Office 4.03, 53 Prince's GateBusiness School BuildingSouth Kensington Campus

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Summary

 

Publications

Citation

BibTex format

@article{Bhamra:2017:10.1016/j.jet.2016.11.005,
author = {Bhamra, HS and Shim, K},
doi = {10.1016/j.jet.2016.11.005},
journal = {Journal of Economic Theory},
pages = {400--431},
title = {Stochastic idiosyncratic cash flow risk and real options: implications for stock returns},
url = {http://dx.doi.org/10.1016/j.jet.2016.11.005},
volume = {168},
year = {2017}
}
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RIS format (EndNote, RefMan)

TY  - JOUR
AB  - Stocks with high idiosyncratic volatility perform poorly relative to low idiosyncratic volatilitystocks. We o↵er a novel explanation of this anomaly based on real options, which is consistentwith earlier findings on idiosyncratic volatility (the positive contemporaneous relation betweenfirm-level stock returns and idiosyncratic volatility). Our approach is based on introducingstochastic idiosyncratic cash flow risk into an equity valuation model of firms with growthoptions. Within our model, a firm’s systematic risk depends on the delta of its growth op-tion. The growth option’s delta is lower when idiosyncratic volatility rises, driving down thefirm’s systematic risk and hence its expected return – firms with higher idiosyncratic volatilitytherefore have lower expected returns. Our model additionally o↵ers the following novel em-pirical predictions: (i) returns correlate positively with idiosyncratic volatility during intervalsbetween large changes in idiosyncratic volatility (the switch e↵ect), and (ii) the anomaliesand the switch e↵ect are stronger for firms with more real options and which undergo largerchanges in idiosyncratic volatility. Empirical results support the predictions of our model.
AU  - Bhamra,HS
AU  - Shim,K
DO  - 10.1016/j.jet.2016.11.005
EP  - 431
PY  - 2017///
SN  - 0022-0531
SP  - 400
TI  - Stochastic idiosyncratic cash flow risk and real options: implications for stock returns
T2  - Journal of Economic Theory
UR  - http://dx.doi.org/10.1016/j.jet.2016.11.005
UR  - http://hdl.handle.net/10044/1/42733
VL  - 168
ER  -
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