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Idiosyncratic volatility, conditional liquidity and stock returns

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  • Malagon, Juliana
  • Moreno, David
  • Rodríguez, Rosa

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.

Suggested Citation

  • Malagon, Juliana & Moreno, David & Rodríguez, Rosa, 2018. "Idiosyncratic volatility, conditional liquidity and stock returns," International Review of Economics & Finance, Elsevier, vol. 53(C), pages 118-132.
    • Handle: RePEc:eee:reveco:v:53:y:2018:i:c:p:118-132
    DOI: 10.1016/j.iref.2017.10.011
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    More about this item

    Keywords

    Idiosyncratic risk; Idiosyncratic volatility anomaly; Regime switching model; Flight to liquidity;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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