COMMON IDIOSYNCRATIC VOLATILITY IN INDONESIA

Abstract

This research aims to examine a factor structure in idiosyncratic volatility and how the shock from common idiosyncratic volatility (CIV) is priced in Indonesia. This study is not only to determine the effect of idiosyncratic volatility, but also to know how the factor structure of idiosyncratic volatility and the exposure of CIV shock on firm. As the research on emerging markets, especially Indonesia, is still yet recorded in literature regarding common idiosyncratic volatility. Idiosyncratic volatility in this study is calculated as variance of residuals from market model regression, and estimated using EGARCH method because of the nature of volatility that has time varying behavior. The study found that there is no significant results in CIV-beta investment strategy and show that changes in CIV is not priced as common factor that explain stock returns in Indonesia. 

Keywords: firm volatility, idiosyncratic risk, cross-section of stock returns, emerging market