Based on the foregoing discussion, we hypothesize that the negative relationship between idiosyncratic volatility and subsequent stock returns is concentrated in stocks with unrealized capital losses. In order to empirically test this hypothesis, we construct a capital gains overhang measure similar to Grinblatt and Han (2005), employing a proxy for the market's aggregate cost basis in a stock as the relevant reference point to determine unrealized gains and losses.
Comparing the value-weighted and equally weighted returns of five idiosyncratic volatility portfolios separately within the subgroups of stocks segregated based on unrealized capital losses (CL) and unrealized capital gains (CG), we find that for the subgroup of stocks with the largest unrealized losses, the difference in monthly value-weighted (equally weighted) raw returns of high and low idiosyncratic volatility portfolios is -1.57% (-1.55%) with a t-statistic of -5.52 (-7.19).
Insurers did not post meaningful amounts of net unrealized capital gains or losses on investments in second-quarter 2011, but that constituted an improvement from insurers' $11.4 billion in net unrealized capital losses
on investments in second-quarter 2010.
As the reality of reserve deficiencies began to be recognized and unrealized capital losses
began to mount in 2000, underwriting directives changed and pricing began to rise sharply, first with property lines and then for reinsurance and casualty lines.
Unrealized capital losses
on shares held by major Japanese banks as of Friday are estimated at 1.35 trillion yen, a surge from the 330 billion yen a year earlier, according to Daiwa Research Institute Inc.
Conversely, net unrealized capital losses
give rise to a deferred tax asset because, upon liquidation of the securities, this will reduce the company's overall liability.
Realized capital gains for the industry were only $6.6 billion and unrealized capital losses
were $18 billion for the second year in a row.
But its accounting firm, Tohmatsu and Co., told the insurer it cannot confirm the accuracy of financial statements compiled by Toho Mutual Life, adding it should write down 100 billion yen in unrealized capital losses
on its securities holdings and 20 billion yen in foreign exchange contracts.
in 1999, returns on revenue and equity dropped below the level of the Standard & Poor's 500 and, in 2000, a wicked combination of underwriting losses and unrealized capital losses
decimated total returns.
Oji Paper, Japan's largest paper maker, saw its net balance sink into the red as it had to write down unrealized capital losses
on its share holdings, the company said.
Realized capital gains for the first six months of 2000 were $7.2 billion pretax for the P/C industry and unrealized capital losses
were $8.5 billion--$7.2 billion shifted to realized gains and $1.3 billion other unrealized losses, as reported in Best's Viewpoint, September 25, 2000.
The company annulled a 28.9 billion yen contract under which it had entrusted trust banks with managing ''tokkin'' specified money trusts that had developed unrealized capital losses
due to the deteriorated investment environment.