Reinvestigate the Bid–Ask Bounce Effect and Pricing of Idiosyncratic Volatility: The Case of the Australian Market

Bin Liu, Monica Tan () and Marie-Anne Cam ()
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Bin Liu: School of Accounting, Economics and Finance, University of Wollongong, NSW 2522, Australia
Monica Tan: School of Economics, Finance and Marketing, RMIT University, VIC 3000, Australia
Marie-Anne Cam: School of Economics, Finance and Marketing, RMIT University, VIC 3000, Australia

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2019, vol. 22, issue 01, 1-23

Abstract: We investigate the bid–ask bounce effect on estimation of idiosyncratic volatility (IVOL) from asset pricing perspective using a comprehensive country-specific sample. We find that the idiosyncratic volatility–return relationship remains significant while controlling for stock size. However, the explanatory power of IVOL disappears completely when stock liquidity is controlled for. These findings support our argument that the bid–ask bounce effect on pricing of IVOL is strongly influenced by stock liquidity. Our results indicate that mid-price is the “true” price to measure IVOL of the least liquid stocks in the Australian stock market.

Keywords: Idiosyncratic volatility; asset pricing; bid–ask bounce; liquidity; Australia (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1142/S0219091519500048

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