Idiosyncratic Volatility, Conditional Liquidity and Stock Returns

32 Pages Posted: 19 Jan 2016  

Juliana Malagon

Universidad de los Andes, Colombia - School of Business Administration

David Moreno

Universidad Carlos III de Madrid - Department of Business Administration

Rosa Rodríguez

Universidad Carlos III de Madrid - Department of Business Administration

Date Written: January 2016

Abstract

There is strong evidence showing that stocks with higher levels of idiosyncratic risk provide relatively lower returns than stocks with lower levels of it. This paper points out that this negative idiosyncratic risk - expected returns relation is not pervasive over time, and provides a plausible explanation for its time-varying nature. Our results suggest that following recessions, the conditional pricing of liquidity creates a correction in prices of the high idiosyncratic volatility stocks that persists up to 10 months. As a result, the negative relation between idiosyncratic risk and expected returns is not observed following recessions.

Keywords: Idiosyncratic risk, idiosyncratic volatility anomaly, regime switching model, flight to liquidity

JEL Classification: G12

Suggested Citation

Malagon, Juliana and Moreno, David and Rodríguez, Rosa, Idiosyncratic Volatility, Conditional Liquidity and Stock Returns (January 2016). Available at SSRN: https://ssrn.com/abstract=2717484 or http://dx.doi.org/10.2139/ssrn.2717484

Juliana Malagon (Contact Author)

Universidad de los Andes, Colombia - School of Business Administration ( email )

Bogota
Colombia

David Moreno

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

Rosa Rodriguez

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain

HOME PAGE: http://www.business.uc3m.es/en/faculty/profesor/perfil/42

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