Idiosyncratic volatility, Australian stock returns and economy conditions: role of idiosyncratic volatility in asset pricing for Australian stock markets

Authors

Bin Liu, Royal Melbourne Institute of TechnologyFollow
Amalia Di Iorio, Royal Melbourne Institute of Technology

RIS ID

112039

Publication Details

Liu, B. & Di Iorio, A. (2012). Idiosyncratic volatility, Australian stock returns and economy conditions: role of idiosyncratic volatility in asset pricing for Australian stock markets. European Financial Management Association 2012 Annual Meeting (pp. 1-37). European Financial Management Association.

Link to publisher version (URL)

European Financial Management Association

Abstract

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.