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Idiosyncratic volatility in the Australian equity market

Angel Zhong

Pacific-Basin Finance Journal, 2018, vol. 50, issue C, 105-125

Abstract: This paper studies the idiosyncratic volatility (IV) puzzle in the Australian equity market. I document a negative relation between IV and future stock returns. More importantly, this is the first Australian study to investigate the role of the asset-pricing model used to estimate IV. While recent work advocates a five-factor model incorporating investment and profitability factors, the findings suggest that the IV puzzle is not an outcome of investment and profitability factors being omitted from the three-factor model used to estimate IV. The exploration of potential causes of the IV puzzle suggests that it is attributable to mispricing, since it concentrates amongst the most-overpriced stocks as given by an Australian mispricing index. Decomposing the source of mispricing, the IV puzzle is largely explained by investors' preference for lottery-like stocks.

Keywords: Idiosyncratic volatility; Anomalies; Mispricing; Fama–French model; Asset pricing (search for similar items in EconPapers)
JEL-codes: G13 (search for similar items in EconPapers)
Date: 2018
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Handle: RePEc:eee:pacfin:v:50:y:2018:i:c:p:105-125