Abstract
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.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
