Market Efficiency and Idiosyncratic Volatility in Vietnam

Thi Ngoc Trang Nguyen,Ngoc Tho Tran

doi:10.5539/ijbm.v10n6p216

Abstract

We study idiosyncratic volatility in the Vietnamese stock market between July 2007 and February 2015. We show that there is no relationship between the idiosyncratic volatility and average returns in the Vietnamese market. Our results also indicate that neither the aggregate market volatility, the aggregate idiosyncratic volatility nor can predict market returns. Finally, we find no trend in idiosyncratic volatility and a decreasing trend of market volatility over the sample period. In addition, we find strong evidence of both short as well as long term reversal in Vietnam stock market during the sample period.

Highlights

The relation between risk and return has been an important topic in the literature
In this paper we study idiosyncratic volatility in the Vietnamese stock market between July 2007 and February 2015
Using a sample of 889 Vietnamese companies we construct Fama and French (1993) risk factors for Vietnam and calculate idiosyncratic volatility which is defined as the standard deviation of the residuals from the Fama and French (1993) model

Summary

Introduction

The relation between risk and return has been an important topic in the literature. Classical asset pricing theory predicts that riskier assets should command higher expected returns. Total risk can be decomposed into systematic risk and idiosyncratic risk This theory prescribes that idiosyncratic risk, which represents the uncertainty of a single firm, should not be priced because investors can diversify idiosyncratic risk. Idiosyncratic risk can be diversified away through constructing portfolios consisting of different securities. In a complete market, agents’ decisions should not be affected by idiosyncratic volatility as it has no impact on investors' welfare. The question of whether idiosyncratic risk has predicting power for the stock returns plays an important role in the asset pricing literature. While the empirical evidence is mixed, the inconsistent findings regarding pricing of idiosyncratic risk and its potential direction of the impact warrant further examination. In this paper we study idiosyncratic volatility in the Vietnamese stock market from July 2007 to February 2015.

Literature Review

Data and Methodology

Results

Conclusion