The Mathematics of Idiosyncratic Volatility and the Small Firm Effect: Australian Evidence

24 Pages Posted: 27 Jun 2011

Date Written: June 6, 2009

Abstract

In the context of Australian stockmarkets, we examine the relationship between a stock’s return performance, the stock idiosyncratic volatility, and the firm’s market capitalization. The paper’s main conclusions may be summarized as follows. The stocks of the smallest firms markedly outperform the largest capitalized stocks, and for such small capitalized stocks, those with greater idiosyncratic volatility have markedly superior returns. It appears that the relationship of higher returns with higher idiosyncratic volatility is consistent with the mathematics of idiosyncratic volatility. In which case, the small size effect may also be interpreted as the mathematical outcome of idiosyncratic volatility. The paper further examines the condition on which the higher returns reported for either small firm size or high idiosyncratic volatility are likely to be wealth-forming. Finally, we observe that the high performances of the stocks of the smallest firms are likely irrelevant to the class of firms that are of interest to the institutional investor.

Suggested Citation

Dempsey, Michael J., The Mathematics of Idiosyncratic Volatility and the Small Firm Effect: Australian Evidence (June 6, 2009). Available at SSRN: https://ssrn.com/abstract=1873199 or http://dx.doi.org/10.2139/ssrn.1873199

Michael J. Dempsey (Contact Author)

Ton Duc Thang University (TDTU) ( email )

District 7
Ho Chi Minh City, 3001
Vietnam

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
82
Abstract Views
619
rank
364,092
PlumX Metrics