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Idiosyncratic Volatility, Momentum, Liquidity, and Expected Stock Returns in Developed and Emerging Markets

Lorne Switzer () and Alan Picard
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Alan Picard: Concordia University, Canada

Multinational Finance Journal, 2015, vol. 19, issue 3, 169-221

Abstract: This paper re-examines the link between idiosyncratic risk and expected returns for a large sample of firms in both developed and emerging markets. Recent studies using Fama-French three-factor models have shown a negative relationship between idiosyncratic volatility and expected returns for developed markets. This relationship has not been studied to date for emerging markets. This study relates the current-month's idiosyncratic volatility to the subsequent month's stock returns for a sample of both developed and emerging markets expanding benchmark factors by including both a momentum and a systematic liquidity risk component. Using a five-factor model, the results suggest that idiosyncratic risk does not play a role on stock returns for most of the developed markets analyzed. In contrast, the paper shows, for the first time, that idiosyncratic risk is positively related to month-ahead expected returns for many emerging markets for this model.

Keywords: idiosyncratic volatility; expected returns; developed vs. emerging markets; asset pricing; multifactor models (search for similar items in EconPapers)
JEL-codes: G11 G12 G15 (search for similar items in EconPapers)
Date: 2015
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Handle: RePEc:mfj:journl:v:19:y:2015:i:3:p:169-221