Reinvestigate the bid-ask bounce effect and pricing of idiosyncratic volatility: The case of the Australian Market

Liu, Bin, Tan, Monica, and Cam, Marie-Anne (2019) Reinvestigate the bid-ask bounce effect and pricing of idiosyncratic volatility: The case of the Australian Market. Review of Pacific Basin Financial Markets and Policies, 22 (1). 1950004.

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Abstract

We investigate the bid–ask bounce effect on estimation of idiosyncratic volatility (IVOL) from asset pricing perspective using a comprehensive country-specific sample. We find that the idiosyncratic volatility–return relationship remains significant while controlling for stock size. However, the explanatory power of IVOL disappears completely when stock liquidity is controlled for. These findings support our argument that the bid–ask bounce effect on pricing of IVOL is strongly influenced by stock liquidity. Our results indicate that mid-price is the “true” price to measure IVOL of the least liquid stocks in the Australian stock market.

Item ID: 72734
Item Type: Article (Research - C1)
ISSN: 1793-6705
Copyright Information: © World Scientific Publishing Co. and Center for Pacific Basin Business, Economics and Finance Research
Date Deposited: 04 Aug 2022 00:18
FoR Codes: 35 COMMERCE, MANAGEMENT, TOURISM AND SERVICES > 3502 Banking, finance and investment > 350202 Finance @ 100%
SEO Codes: 15 ECONOMIC FRAMEWORK > 1505 Microeconomics > 150506 Market-based mechanisms @ 100%
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