Liquidity Biases and the Pricing of Cross-Sectional Idiosyncratic Volatility Around the World

46 Pages Posted: 19 Mar 2011 Last revised: 29 Aug 2014

See all articles by Yufeng Han

Yufeng Han

University of North Carolina (UNC) at Charlotte - Finance

Ting Hu

Wuhan University - School of Economics and Management

David A. Lesmond

Tulane University - A.B. Freeman School of Business

Date Written: June 23, 2014

Abstract

This paper examines data from 45 world markets and shows that the previously documented relation between mean returns and idiosyncratic volatility arises because of biases in volatility estimates that we can attribute to the bid-ask bounce in trade prices. We show that no significant relation exists between mean returns and idiosyncratic volatility estimated from quote-midpoint returns. Further, there is no significant relation between mean returns and the portion of transaction-price based idiosyncratic volatility that is orthogonal to bid-ask spreads. The pricing of idiosyncratic volatility is due to the negative pricing of the bid-ask spread.

Keywords: Cross-Sectional Return, International Markets, Idiosyncratic Volatility, Bid-Ask Spread

JEL Classification: C12

Suggested Citation

Han, Yufeng and hu, ting and Lesmond, David A., Liquidity Biases and the Pricing of Cross-Sectional Idiosyncratic Volatility Around the World (June 23, 2014). AFA 2012 Chicago Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1787361 or http://dx.doi.org/10.2139/ssrn.1787361

Yufeng Han

University of North Carolina (UNC) at Charlotte - Finance ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States

Ting Hu

Wuhan University - School of Economics and Management ( email )

Wu Han, Hu-Bai 430072
China

David A. Lesmond (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
511 Goldring-Woldenberg Hall
New Orleans, LA 70118
United States
504-865-5665 (Phone)
504-865-6751 (Fax)

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