Security Returns and Idiosyncratic Volatility in the Indian Stock Market

The study explores the possibility of rewards for holding undiversified portfolios by investors and examines the impacts of idiosyncratic volatility on expected cross-sectional returns for the Indian stock market. For the analysis, the study utilized the constituent companies of the BSE S&P 500 index as a sample for the period starting from July 2014 to June 2019. The study employed Fama and MacBeth’s (1973) two-step cross-sectional regression to assess the impact of the idiosyncratic volatility. The findings reveal a significant negative association between idiosyncratic volatility and returns of the security. Particularly, the size-based sample results show a negative relationship of idiosyncratic volatility on security returns for medium and large-sized securities. Hence, the findings confirm the existence of the idiosyncratic volatility anomaly in the stock market of India and adding stocks to the portfolios may not increase the expected returns for investors.