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Idiosyncratic volatility, conditional liquidity and stock returns

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URI: https://hdl.handle.net/10016/33642
ISSN: 1059-0560
DOI: https://doi.org/10.1016/j.iref.2017.10.011
UXXI: AR/0000020906
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idiosyncratic_IREF_2018_ps.pdf (1.05 MB)
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2018-01-01
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Elsevier
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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 9 months. As a result, the negative relation between idiosyncratic risk and expected returns is not observed following recessions.
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Idiosyncratic risk, Idiosyncratic volatility anomaly, Regime switching model, Flight to liquidity
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Malagon, J., Moreno, D., & Rodríguez, R. (2018). Idiosyncratic volatility, conditional liquidity and stock returns. International Review of Economics & Finance,53, pp. 118-132
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