Idiosyncratic volatility and cross-sectional stock returns in Southeast Asian stock markets

Authors


  • We thank two anonymous referees and the editor (Professor Robert Faff) for their most valuable comments and suggestions. The financial support provided by the Lincoln University Research Fund (LURF) is gratefully acknowledged. We also acknowledge the excellent research assistance of Ji (George) Wu.

Abstract

We examine the role of idiosyncratic risk in five ASEAN markets of Malaysia, Singapore, Thailand, Indonesia, and the Philippines. Our research was motivated by the findings of Ang et al. (2006, 2009) of a ‘puzzling’ negative relation between idiosyncratic volatility and 1-month ahead stock returns in developed markets and the suggestion of the ubiquity of these results in other markets. In contrast, we find no evidence of an idiosyncratic volatility puzzle in these Asian stock markets; instead, we document a positive relationship between idiosyncratic volatility and returns in Malaysia, Singapore, Thailand, and Indonesia and no relationship in the Philippines. The idiosyncratic volatility trading strategy could result in significant trading profits in Malaysia, Singapore, Thailand, and to some extent in Indonesia. Our study underscores the fact that generalizing empirical results obtained in developed stock markets to new and emerging markets could potentially be misleading.

Ancillary