Zhong, A. (2018). Idiosyncratic volatility in the Australian equity market. Pacific-Basin Finance Journal,50 105-125. Netherlands: Elsevier. Retrieved from https://doi.org/10.1016/j.pacfin.2017.06.010
This paper studies the idiosyncratic volatility (IV) puzzle in the Australian equity market. I document a negative relation between IV and future stock returns. More importantly, this is the first Australian study to investigate the role of the asset-pricing model used to estimate IV. While recent work advocates a five-factor model incorporating investment and profitability factors, the findings suggest that the IV puzzle is not an outcome of investment and profitability factors being omitted from the three-factor model used to estimate IV. The exploration of potential causes of the IV puzzle suggests that it is attributable to mispricing, since it concentrates amongst the most-overpriced stocks as given by an Australian mispricing index. Decomposing the source of mispricing, the IV puzzle is largely explained by investors' preference for lottery-like stocks.
Peter Faber Business School
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