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This study examines the importance of idiosyncratic volatility in asset pricing for Australian stock returns from 1993 to 2010. We form an idiosyncratic volatility mimicking factor. In the presence of the Fama-French three-factor we find that the idiosyncratic volatility mimicking factor is priced in Australian stock returns over the sample period, implying that this type of volatility is significant in the pricing of Australian stocks. Further, we find that idiosyncratic volatility is priced during both economy expansions and contractions and our model captures greater variations in Australian stock returns during expansions than contractions.