Exploring the Idiosyncratic Volatility Anomaly in the Swedish Stock Market: An Empirical Analysis of its Impact on Returns

Abstract: We examine the cross-sectional relationship between idiosyncratic volatility relative to the Fama-French three factor model and expected stock returns. We find that portfolios containing the firms with the lowest idiosyncratic risk offers excess returns in relation to the prediction of the Fama-French three factor model, while those with the highest idiosyncratic risk do not. We test our findings to an E-GARCH estimated idiosyncratic volatility and find that the relation between low idiosyncratic risk and excess returns persist. The results are not explained by firm size or book-to-market ratio but when controlling for different weighting schemes and smaller time samples, weaknesses in the anomaly are apparent.