The Pricing of Idiosyncratic Volatility: An Australian Study

Posted: 4 May 2016

See all articles by Bin Liu

Bin Liu

RMIT University

Amalia Di Iorio

La Trobe Business School

Date Written: May 1, 2016

Abstract

This study examines the importance of idiosyncratic volatility in asset pricing for Australian stock returns from January 2002 to December 2010. Inspired by work from the early 1990s which found that portfolios constructed to mimic common risk factors explained significant variations in US stock returns, we construct an idiosyncratic volatility mimicking factor to explore the explanatory power of this factor in the Australian stock market. Our results indicate that (a) the idiosyncratic volatility mimicking factor is priced and positively related to the stock returns for the sample period, (b) the explanatory power of the idiosyncratic volatility mimicking factor remains robust in both time-series and cross-sectional analysis, and (c) big size stocks are systematically riskier than small size stocks.

Keywords: Idiosyncratic volatility, asset pricing, stock returns, risk, Australia

Suggested Citation

Liu, Bin and Di Iorio, Amalia, The Pricing of Idiosyncratic Volatility: An Australian Study (May 1, 2016). Australian Journal of Management, Vol. 41, No. 2, 2016, Available at SSRN: https://ssrn.com/abstract=2774680

Bin Liu (Contact Author)

RMIT University ( email )

124 La Trobe Street
Melbourne, 3000
Australia

Amalia Di Iorio

La Trobe Business School ( email )

Department of Economics and Finance
Victoria 3552, 3086
Australia

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