Are company size and stock beta, liquidity and idiosyncratic volatility related to stock returns? Australian evidence

Abstract

The degree to which any one of a firm's beta, market capitalization, stock liquidity or idiosyncratic volatility of stock returns may be a proxy for one or more of the other variables in explaining the cross-sections of market return performances remains controversial. In the context of Australian markets, we reveal how return performances appear to relate to these variables individually as well as in combination. The paper's main conclusions are as follows. We find no general tendency for any of the considered variables of beta, market capitalization, liquidity or idiosyncratic volatility, to influence the overall pattern of returns for large capitalized Australian stocks. However, the smallest capitalized stocks markedly outperform the largest capitalized stocks, and for such small capitalized stocks those with greater idiosyncratic volatility have markedly superior returns. It appears therefore that we have little evidence to support the notion that asset pricing models for Australian markets might be successfully related to these variables.