Idiosyncratic Volatility and cross-section of abnormal- and anomaly-returns : Empirical evidence from an emerging market

The well-known IVOL anomaly shows that stocks with higher idiosyncratic risk provide lower subsequent stock returns (i.e., Ang et al., 2006, 2009). It is the first study that calculates abnormal-return (alpha) by using various models to observes IVOL-return relation in the Pakistani stock market from the period 2003-2018. We document a negative relationship between idiosyncratic risk and subsequent returns, both the stocks with negative and/or positive abnormal-returns. These results are robust, even estimate abnormal returns with five various asset pricing models and control other stock return predictors. Further analysis that involves short- and long-legs of mispricing anomalies of Stambaugh et al. (2015) reveals a negative relationship between future returns and previous IVOL on the short and long legs, but stronger and robust only for anomaly portfolios short-side. Finally, buying (selling) the anomaly portfolio long (short) sides with the highest IVOL generates statistically significant monthly abnormal returns ranging between 0.28% and 0.55% better than standard benchmark (i.e., equally weighs twelve equity anomalies). The outcomes are robust to certain considerations (i.e., several numbers of anomalies in the portfolios). Our findings offer new sights for both researchers and investors, and analysis may be instructive for investors (researchers) having to invest (research) mandates towards other emerging stock markets of similar size and characteristics