Idiosyncratic volatility and expected return in the Australian market

After Ang, Hodrick, Xing and Zhang (2006) found a negative relationship between idiosyncratic volatility and return, researchers have extensively debated the relationship between the two. Previous literature however has been limited to cross-sectional analyses which can be biased if firm and time effects exist in data. This research adopts the twodimensional clustered standard errors approach, recommended by Petersen (2009) and Thompson (2009) and finds a negative relationship between idiosyncratic risk and expected return in the Australian market over the period of August 1999 to February 2010. The negative relationship is even clearly shown among the above average size equities. In addition, the Australian equities returns are positively related to size and book-to-market ratio on the two-dimensional clustered standard errors approach