The Relationship Between Idiosyncratic, Stock Market Volatility and Excess Stock Returns

This research explained the relationship between idiosyncratic, stock market volatility and excess stock returns. It used the dependent variable of excess returns (ER) and independent variables of idiosyncratic volatility (IV), stock market volatility (MV), detrended volatility (DV), and risk free (RF). This study used the companies’ data of the Karachi Meezan, 30 index, which is an Islamic free float index. The time span of data was ranging from 2012 to 2016. The results show the value weighted idiosyncratic stock return volatilities has a predictive power for excess stock market returns. Further by introducing risk free rate of return in the model, it shows a positive and strong inclination of predicting the excess stock market. Out-of-sample estimates of the model is also good and fit on many estimators in forecast evaluation.