Expected cross-sectional stock return idiosyncratic volatility and stock delistings

Purpose We estimate expected cross-sectional idiosyncratic stock return volatility (expected IVOL), explore its dynamics and attempt to link it to the characteristics related to the real economy. Design/methodology/approach We estimate expected cross-sectional idiosyncratic stock return volatility at the annual frequency in the setting of an Inter-temporal Capital Asset Pricing Model model by applying a Generalized Method of Moments with a Common Shock. Findings We find that the number of stock issues delisted from exchanges have a significant effect on expected IVOL. The discovered relationship is robust to controlling for aggregate financial and economic variables previously found in the literature to contribute to average IVOL. Originality/value Our empirical findings are supported by a formal model. Firms’ stock delistings are mainly associated with mergers and stock drops, which effect on expected IVOL (across the firms’ surviving rivals) and is explained in the context of Bayesian Cournot-Nash equilibrium.