Idiosyncratic volatility, conditional liquidity and stock returns Articles uri icon

publication date

  • January 2018

start page

  • 118

end page

  • 132

volume

  • 53

international standard serial number (ISSN)

  • 1059-0560

electronic international standard serial number (EISSN)

  • 1873-8036

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.

keywords

  • idiosyncratic risk; idiosyncratic volatility anomaly; regime switching model; flight to liquidity