Do stock fundamentals explain idiosyncratic volatility? Evidence for Australian stock market

This study examines the relationships between stock fundamental ratios and idiosyncratic volatility from 1993 to 2010 for Australian Securities Exchange listed companies. The portfolio analysis results show that high idiosyncratic volatility companies tend to be small (measured by size), highly leveraged (measured by interest cover ratio), low profitability (measured by return on equity and earnings per share), low valuation (measured by price to earnings ratio) companies. The regression analysis results show that dividend yield is positively related to the idiosyncratic volatility. Price to earnings ratio and return on equity are negatively related to the idiosyncratic volatility. The relationships between the idiosyncratic volatility and the stock fundamental ratios remain robustness in presence of size. JEL classification: G10