Determinants of idiosyncratic volatility: Evidence from the Indian stock market

Jyoti Kumari, Jitendra Mahakud and Gourishankar Hiremath

Research in International Business and Finance, 2017, vol. 41, issue C, 172-184

Abstract: This paper investigates whether firm-specific characteristics explain idiosyncratic volatility in the stocks of non-financial firms traded in the Indian stock market. It employs the linear time series five-factor model, augmented with a liquidity factor and the conditional EGARCH model, to extract yearly idiosyncratic volatility. We estimate a panel data regression to quantify the relationship between firm-specific characteristics and the volatility of individual securities. The results show that idiosyncratic volatility is significant in emerging markets such as India, and that cross-sectional return variations of firms are associated with firm-specific characteristics such as firm size, book-to-market ratio, momentum, liquidity, cash flow-to-price ratio, and returns on assets. We find that the idiosyncratic risk documented in this study is associated with smaller size of company, higher liquidity, low momentum, high book-to-market ratio, and low cash flow-to-price ratio. The findings suggest need to develop alternative tools to make investment decisions in emerging markets.

Keywords: Idiosyncratic volatility; Conditional exponential generalized heteroscedasticity model; Firm characteristics; Liquidity; Size and momentum (search for similar items in EconPapers)
JEL-codes: C2 C3 C58 E5 G11 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:41:y:2017:i:c:p:172-184

DOI: 10.1016/j.ribaf.2017.04.022

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