Idiosyncratic volatility puzzle exists at the country level

Abstract

This paper reexamines the idiosyncratic volatility puzzle using 47 stock market indices from 1995 to 2016. We find that country-specific idiosyncratic volatility is significantly and negatively related to subsequent returns in the international markets, confirming the existence of the idiosyncratic volatility puzzle at the country level. Our results show that the positive relationship between idiosyncratic volatility and country-specific index returns documented by Bali and Cakici (2010) and Hueng and Yau (2013) is not robust to sample selections and model misspecifications. We show that the country-level idiosyncratic volatility puzzle consistently exists after controlling for different model specifications and market segmentation in various subsamples.