Determinants of idiosyncratic volatility of stock returns listed firms in Tehran Stock Exchange

Document Type : Original Article

Authors

1 Master of Financial Management, Shahrekord Branch, Islamic Azad University, Shahrekord, Iran.

2 Associate Prof, Department of Acconting, Isfahan University, Isfahan, Iran

Abstract

This study aims to investigate the effect of firm-specific characteristics predicting stock return on future idiosyncratic volatility. The sample of the study comprises of 100 listed firms on Tehran Stock Exchange during the period 2010 to 2017. The decile portfolio analysis approach has been used to determine the specific characteristics of stock return predictors. Also, the time series of the CAPM model and the EGARCH model are applied to extract conditional and unconditional idiosyncratic volatility on individual securities. In addition, a multivariate regression with a combination of data was used to examine the quality of the relationship between the firm-specific characteristics predicting stock return and the future idiosyncratic volatility of individual securities in the conditional and unconditional framework. The results of the portfolio analysis show that cross-sectional return variations of firms are associated with firms-specific characteristics such as firm size, book-to-market ratio, liquidity, momentum, and cash flow-to-price ratio. Also, the results show that the reverse and significant impact of the firm size and the cash flow-to-price ratio as well as the direct and significant impact of the book-to-market ratio and liquidity on the future idiosyncratic volatility

Keywords

References

  1. Aabo, T. Pantzalis, C. & Park, J. C. (2017). Idiosyncratic volatility: An indicator of noise trading? Journal of Banking & Finance, 75, 136-151.
  2. Abarbanell, J. S. & Bushee, B. J. (1998). Abnormal returns to a fundamental analysis strategy. Accounting Review. 73,19-45.‏
  3. Ang, A. Hodrick, R. J. Xing, Y. & Zhang, X. (2006). The cross‐section of volatility and expected returns. The Journal of Finance, 61(1), 259-299.‏
  4. Ang, A. Hodrick, R. J. Xing, Y. & Zhang, X. (2009). High idiosyncratic volatility and low returns: International and further US evidence. Journal of Financial Economics, 91(1), 1-23.
  5. Artmann, S., Finter, P., & Kempf, A. (2012). Determinants of expected stock returns: large sample evidence from the German market. Journal of Business Finance & Accounting, 39(5‐6), 758-784.
  6. Barberis, N., Huang, M., & Santos, T. (2001). Prospect theory and asset prices. The quarterly journal of economics, 116(1), 1-53.
  7. Berggrun, L. Lizarzaburu, E. & Cardona, E. (2016). Idiosyncratic volatility and stock returns: Evidence from the MILA. Research in International Business and Finance, 37, 422-434.
  8. Black, F. & Scholes, M. (1973). The pricing of options and corporate 7. liabilities. Journal of political economy, 81(3), 637-654.
  9. Brown, D. P., & Ferreira, M. A. (2004). Information in the idiosyncratic volatility of small firms, Working Paper, University of Wisconsin-Madisan and ISCTE Business School-Lisbon.
  10. Brown, G., & Kapadia, N. (2007). Firm-specific risk and equity market development. Journal of Financial Economics, 84(2), 358-388.
  11. Campbell, J. Y., Lettau, M., Malkiel, B. G., & Xu, Y. (2001). Have individual stocks become more volatile? An empirical exploration of idiosyncratic risk. The Journal of Finance, 56(1), 1-43.
  12. Chen, Z. & Petkova, R. (2012). Does idiosyncratic volatility proxy for risk exposure? The Review of Financial Studies, 25(9), 2745-2787.
  13. Chen, X. Kim, K. A. Yao, T. & Yu, T. (2010). On the predictability of Chinese stock returns. Pacific-Basin Finance Journal, 18(4), 403-425.
  14. Davalou, M, Farvatokzadeh, H. (2016). Cross-sectional changes in returns: liquidity and Idiosyncratic risk effects. Journal of Accounting Knowledge, 7(26), 85-106. (In Persian)
  15. Fama, E., & Macbeth, J. (1973). Risk, Return, and Equilibrium: Empirical Tests. Journal of Political Economy 81, 607-636.
  16. Fu, F. (2009). Idiosyncratic risk and the cross-section of expected stock returns. Journal of Financial Economics, 91(1), 24-37.
  17. Ghorbani, B, Foroughi, D, Amiri, H, Hashemi, A. (2013). Financial reporting quality and Idiosyncratic volatility of stock return. Financial Knowledge Analysis of Securities, 6(1), 45-61. (In Persian)
  18. Goyal, A., & Santa‐Clara, P. (2003). Idiosyncratic risk matters!. The Journal of Finance, 58(3), 975-1007.
  19. Goetzmann, W. N., & Kumar, A. (2008). Equity portfolio diversification. Review of Finance, 12(3), 433-463.
  20. Haberman, Gur, (2001), Familiarity breeds investment, Review of Financial studies 14, 659-680.
  21. Hiremath, G. S. (2014). Indian stock market: An empirical analysis of informational efficiency. Springer India.
  22. Jiang, G. J. Xu, D. & Yao, T. (2009). The information content of idiosyncratic volatility. Journal of Financial and Quantitative Analysis, 44(1), 1-28.
  23. Keene, M. A. & Peterson, D. R. (2007). The importance of liquidity as a factor in asset pricing. Journal of Financial Research, 30(1), 91-109.
  24. Kumari, J. Mahakud, J. & Hiremath, G. S. (2017). Determinants of idiosyncratic volatility: Evidence from the Indian stock market. Research in International Business and Finance, 41, 172-184.
  25. Lintner, J. (1965). The valuation of risky assets and the selection of risky investments in stock portfolios and capital budgets, Review of Economics and Statistics, 47, 13-37.
  26. Malkiel, B. G. & Xu, Y. (2002). Idiosyncratic risk and security returns. University of Texas at Dallas (November 2002).
  27. Markowitz, H. (1952). Portfolio selection. The journal of finance, 7(1), 77-91.
  28. Mossin, J. (1966). Equilibrium in a capital asset market. Econometrica: Journal of the econometric society,34, 768-783.
  29. Nelson, D. B. (1991). Conditional heteroskedasticity in asset returns: A new approach. Econometrica: Journal of the Econometric Society,59(2), 347-370.
  30. Nikosokhan, M, FadaeiNejad, M. (2017). Investigate the Importance of unsystematic Risk in Each Stock Sheet: Another Look at unsystematic Risk and return. Financial Management Strategy, (1)6, 24-1. (In Persian)
  31. Pastor, Ľ., & Pietro, V. (2003). Stock valuation and learning about profitability. The Journal of Finance, 58(5), 1749-1789.
  32. Sharpe, W. F. (1964). Capital asset prices: A theory of market equilibrium under conditions of risk. The journal of finance, 19(3), 425-442.
  33. Vozlyublennaia, N. (2013). Do firm characteristics matter for the dynamics of idiosyncratic risk? Journal of International Financial Markets, Institutions and Money, 27, 35-46.

Files

Share

How to cite

Statistics