Idiosyncratic volatility and security returns: Australian evidence

This article examines whether idiosyncratic risk is priced for equities listed in the Australian Stock Exchange (ASX). Specifically, this article follows the methodology of Bali et al. (2005) and investigates whether idiosyncratic volatility is able to predict 1-month ahead excess returns on the value-weighted market index (the All Ordinaries Index - AOI), over the period 1980:01 to 2004:12. We also investigate whether the idiosyncratic volatility is priced differently in partitioned subperiods. Our findings suggest that idiosyncratic volatility is not priced in the Australian market.