Are idiosyncratic risk and extreme positive return priced in the Indian equity market?

Abstract

<p>In this paper, we examine whether the IVOL (Idiosyncratic Volatility) and MAX (Extreme Positive<br />Return) can predict future returns in the Indian stock market where a short sale is restricted with<br />no naked short sale allowed. We find that both IVOL and MAX have significantly positive and<br />persistent effects on expected returns in this market. In subsamples, we document that small firms<br />have positive IVOL and MAX effects. However, more interestingly, after including all the controls,<br />in contrast to the finding of Bali et al. (2011), the IVOL and MAX effects are significantly negative<br />for the large firms in this market implying the investors’ response to IVOL and MAX with the<br />perception of low growth prospects of large firms. We use both portfolio level and firm-level Fama<br />Macbeth cross-sectional analysis to show the effects. <br /></p>