The Bid-Ask Bounce Effect and the Pricing of Cross-Sectional Idiosyncratic Volatility: An Australian Study

16 Pages Posted: 13 Feb 2015

See all articles by Bin Liu

Bin Liu

RMIT University

Michael J. Dempsey

Ton Duc Thang University (TDTU)

Monica Tan

RMIT University; Financial Research Network (FIRN)

Date Written: February 11, 2015

Abstract

Han and Lesmond (2011) find that stock liquidity, namely bid-ask bounce, affects the pricing of idiosyncratic volatility. Following Ang et al. (2009) and Han and Lesmond (2011), we investigate the pricing of idiosyncratic volatility and liquidity-adjusted idiosyncratic volatility over the period January 2004 to December 2013 using a comprehensive Australian dataset. Our results indicate that (1) both lagged idiosyncratic volatility and lagged liquidity-adjusted idiosyncratic volatility are strongly and positively related to stock returns over the sample period; (2) consistent with Han and Lesmond (2011), the pricing of idiosyncratic volatility is largely captured by stock liquidity; (3) our liquidity adjusted idiosyncratic volatility estimates work well in explaining the variations of the stocks of small firms but do not explain much variations in stocks of large firms when size and BE/ME are controlled; (4) high idiosyncratic volatility stocks tend to be of small, volatile and illiquid.

Keywords: idiosyncratic volatility, asset pricing, bid-ask bounce, stock returns, Australia

JEL Classification: G12

Suggested Citation

Liu, Bin and Dempsey, Michael J. and Tan, Monica, The Bid-Ask Bounce Effect and the Pricing of Cross-Sectional Idiosyncratic Volatility: An Australian Study (February 11, 2015). 2015 Financial Markets & Corporate Governance Conference, Available at SSRN: https://ssrn.com/abstract=2563610 or http://dx.doi.org/10.2139/ssrn.2563610

Bin Liu (Contact Author)

RMIT University ( email )

124 La Trobe Street
Melbourne, 3000
Australia

Michael J. Dempsey

Ton Duc Thang University (TDTU) ( email )

District 7
Ho Chi Minh City, 3001
Vietnam

Monica Tan

RMIT University ( email )

35 Herlihys Rd
Templestowe Lower, 3107
Australia
403388233 (Phone)

Financial Research Network (FIRN)

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

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

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