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The pricing of idiosyncratic volatility: An Australian study

Author

Listed:
  • 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)

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.

Suggested Citation

  • Bin Liu & Amalia Di Iorio, 2016. "The pricing of idiosyncratic volatility: An Australian study," Australian Journal of Management, Australian School of Business, vol. 41(2), pages 353-375, May.
    • Handle: RePEc:sae:ausman:v:41:y:2016:i:2:p:353-375
    DOI: 10.1177/0312896214541554
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    References listed on IDEAS

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    Cited by:

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    3. Zhong, Angel & Gray, Philip, 2016. "The MAX effect: An exploration of risk and mispricing explanations," Journal of Banking & Finance, Elsevier, vol. 65(C), pages 76-90.

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    More about this item

    Keywords

    Idiosyncratic volatility; asset pricing; stock returns; risk; Australia;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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