Idiosyncratic volatility and security returns: evidence from Germany and United Kingdom
AbstractPurpose – Malkiel and Xu state that idiosyncratic volatility is highly correlated with size and that it plays a powerful role in explaining expected returns. The purpose of this paper is to ask whether idiosyncratic volatility is useful in explaining the variation in expected returns; and whether the findings can be explained by the turn of the year effect. Design/methodology/design – Monthly stock returns and market values of all listed firms in Germany and UK covering the period 1991-2001 from Datastream are used as the basis of the evaluation. Findings – The paper finds that the three-factor model provides a better description of expected returns than the Capital Asset Pricing Model (CAPM). That is, it is found that firm size and idiosyncratic volatility are related to security returns. In addition, it is noted that the findings are robust throughout the sample period Originality/value – The paper shows that the CAPM beta alone is not sufficient to explain the variation in stock returns.
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Bibliographic InfoArticle provided by Emerald Group Publishing in its journal Studies in Economics and Finance.
Volume (Year): 23 (2006)
Issue (Month): 2 (June)
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- Michael E. Drew & Tony Naughton & Madhu Veeraraghavan, 2003.
"Is Idiosyncratic Volatility Priced? Evidence from the Shanghai Stock Exchange,"
School of Economics and Finance Discussion Papers and Working Papers Series
138, School of Economics and Finance, Queensland University of Technology.
- Drew, Michael E. & Naughton, Tony & Veeraraghavan, Madhu, 2004. "Is idiosyncratic volatility priced?: Evidence from the Shanghai Stock Exchange," International Review of Financial Analysis, Elsevier, vol. 13(3), pages 349-366.
- Michael E. Drew & Mirela Mallin & Tony Naughton & Madhu Veeraraghavan, 2004. "Equity Premium: - Does it exist? Evidence from Germany and United Kingdom," School of Economics and Finance Discussion Papers and Working Papers Series 170, School of Economics and Finance, Queensland University of Technology.
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