The pricing of idiosyncratic volatility: An Australian study

Bin Liu and Amalia Di Iorio
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Bin Liu: School of Economics, Finance and Marketing, RMIT University, Melbourne, VIC, Australia
Amalia Di Iorio: Faculty of Business, Economics and Law, La Trobe University, Melbourne, VIC, Australia

Australian Journal of Management, 2016, vol. 41, issue 2, 353-375

Abstract: This study examines the importance of idiosyncratic volatility in asset pricing for Australian stock returns from January 2002 to December 2010. Inspired by work from the early 1990s which found that portfolios constructed to mimic common risk factors explained significant variations in US stock returns, we construct an idiosyncratic volatility mimicking factor to explore the explanatory power of this factor in the Australian stock market. Our results indicate that (a) the idiosyncratic volatility mimicking factor is priced and positively related to the stock returns for the sample period, (b) the explanatory power of the idiosyncratic volatility mimicking factor remains robust in both time-series and cross-sectional analysis, and (c) big size stocks are systematically riskier than small size stocks.

Keywords: Idiosyncratic volatility; asset pricing; stock returns; risk; Australia (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:41:y:2016:i:2:p:353-375

DOI: 10.1177/0312896214541554

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