Idiosyncratic Volatility, Return Reversals and Momentum: Australian Evidence

41 Pages Posted: 24 Aug 2010

See all articles by Andrew R. Grant

Andrew R. Grant

University of Sydney - Discipline of Finance, Faculty of Economics and Business; Financial Research Network (FIRN)

Jason Phung

University of Sydney - Discipline of Finance

Date Written: August 23, 2010

Abstract

This paper examines the interaction between short-run return reversals, momentum and idiosyncratic volatility in the Australian market. We confirm that stocks with high idiosyncratic volatility earn low average returns over the next month. Unlike US studies which attribute this negative relation to short-run return reversals, we find that it is partly caused by a group of loser stocks (formed over one month) which continue to exhibit negative return drift (over the next month). We also investigate whether these stocks continue to display negative returns over longer horizons. In turn, we broaden our study to examine whether the momentum effect is persistent in stocks with high idiosyncratic volatility. We find that stocks with high idiosyncratic volatility realize significant abnormal momentum returns over a six-month holding period relative to stocks with low idiosyncratic volatility. As we document the persistence of momentum profits amongst stocks with high idiosyncratic volatility, our work contributes to the existing literature which suggests that idiosyncratic volatility is an important limit to the arbitrage of the momentum effect.

Keywords: idiosyncratic volatility, return reversals, momentum, limits to arbitrage, Australia

JEL Classification: G10, G12, G14

Suggested Citation

Grant, Andrew R. and Phung, Jason, Idiosyncratic Volatility, Return Reversals and Momentum: Australian Evidence (August 23, 2010). 23rd Australasian Finance and Banking Conference 2010 Paper. Available at SSRN: https://ssrn.com/abstract=1663777 or http://dx.doi.org/10.2139/ssrn.1663777

Andrew R. Grant

University of Sydney - Discipline of Finance, Faculty of Economics and Business ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
61-2-9036-7991 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Jason Phung (Contact Author)

University of Sydney - Discipline of Finance ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

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