Proceedings of the 5th Economic & Finance Conference, Miami

IDIOSYNCRATIC RISK AND STOCK RETURNS: A QUANTILE REGRESSION APPROACH

TARIQ AZIZ, VALEED AHMAD ANSARI

Abstract:

The relation between idiosyncratic risk and stock returns is currently a topic of debate in the academic literature. So far the evidence regarding the relation is mixed. This study aims to investigate the cross-sectional relation between idiosyncratic risk and stock returns in the Indian stock market employing quantile regressions. Using quantile regressions, this study demonstrates that idiosyncratic volatility and stock returns relation is quantile dependent. The relation between idiosyncratic volatility and stock returns is parabolic. The high idiosyncratic risk is associated with high (low) excess returns at the upper (lower) quantile of the conditional distribution. This partially explains the inconclusive evidence on the idiosyncratic volatility and the stock returns relation in the literature.

Keywords: idiosyncratic volatility; quantile regression; asset pricing; emerging markets; India,

DOI: 10.20472/EFC.2016.005.002

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