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Idiosyncratic Volatility and Cross-section of Stock Returns: Evidences from India

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  • Prashant Sharma
  • Brajesh Kumar

Abstract

The present study examines the cross-sectional pricing ability of idiosyncratic volatility (IV) in Indian stock market and investigates the relationship amongst expected idiosyncratic volatility (EI), unexpected idiosyncratic volatility (UI), and cross-section of stocks returns. The study uses ARIMA (2, 0, 1) model to IV into EI and UI. The stocks returns are regressed on IV, EI and UI using Newey-West (1987) corrections, in order to investigate their empirical relationship. The study finds that IV is positively related with stock returns. Further the IV significantly explains the cross-section of stock returns in Indian context. After imposing control over UI, as it is highly correlated with unexpected returns, the inter-temporal relationship between EI and expected returns turns out to be positive.

Suggested Citation

  • Prashant Sharma & Brajesh Kumar, 2016. "Idiosyncratic Volatility and Cross-section of Stock Returns: Evidences from India," Asian Journal of Finance & Accounting, Macrothink Institute, vol. 8(1), pages 112-112, December.
    • Handle: RePEc:mth:ajfa88:v:8:y:2016:i:1:p:112
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    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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