Do idiosyncratic volatility and liquidity in stock returns still matter in post-global financial crisis? The UK evidence

Ghaith El-Nader and Yasmeen Al-Halabi

International Journal of Banking, Accounting and Finance, 2023, vol. 13, issue 3, 403-422

Abstract: This paper investigates the roles of idiosyncratic volatility and liquidity in explaining the variation in the UK stock returns following the aftermath of the global financial crisis. Results provide strong evidence of a positive idiosyncratic volatility premium across different return data intervals, implying that investors require compensation for higher idiosyncratic volatility stocks. Also, liquidity explains the positive idiosyncratic volatility-return relation and must be considered when seeking a move away from highly volatile stocks. Results of the industry analysis indicate that idiosyncratic volatility (liquidity) is relevant in explaining variations in six (seven) of the ten industry-level returns. The findings of this paper are important for active investors to understand how different industry volatilities are related, and therefore to increase their diversification capacity or speculate by timing their investment strategies.

Keywords: idiosyncratic volatility; liquidity; UK stock market. (search for similar items in EconPapers)
Date: 2023
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Persistent link: https://EconPapers.repec.org/RePEc:ids:injbaf:v:13:y:2023:i:3:p:403-422

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