Idiosyncratic volatility, conditional liquidity and stock returns

Juliana Malagon, David Moreno and Rosa Rodríguez

International Review of Economics & Finance, 2018, vol. 53, issue C, 118-132

Abstract: There is strong evidence showing that stocks with higher levels of idiosyncratic risk provide relatively lower returns than stocks with lower levels of it. This paper points out that this negative idiosyncratic risk - expected returns relation is not pervasive over time, and provides a plausible explanation for its time-varying nature. Our results suggest that following recessions, the conditional pricing of liquidity creates a correction in prices of the high idiosyncratic volatility stocks that persists up to 9 months. As a result, the negative relation between idiosyncratic risk and expected returns is not observed following recessions.

Keywords: Idiosyncratic risk; Idiosyncratic volatility anomaly; Regime switching model; Flight to liquidity (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:53:y:2018:i:c:p:118-132

DOI: 10.1016/j.iref.2017.10.011

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