Does idiosyncratic volatility predict future growth of the Australian economy?

Abstract

Purpose

This paper aims to examine whether idiosyncratic volatility and other asset pricing factors predict growth rates of the ten Australian economic indicators.

Design/methodology/approach

The authors use the Liew and Vassalou (2000) model augmented with an idiosyncratic volatility factor to investigate the issue.

Findings

Using regression analysis, the authors find that the asset pricing factors can be used to predict the growth rates for eight out of the ten economic indicators. Moreover, using portfolio performance analysis, the authors find that high returns of size factor and a book-to-market factor portfolios precede periods of good macroeconomic states, whereas high returns of HIMLI portfolios precede periods of bad macroeconomic states.

Originality/value

To the authors’ knowledge, the relationship between idiosyncratic volatility and Australian economic growth has not been investigated explicitly in the literature.

Citation

Liu, B. and Di Iorio, A. (2016), "Does idiosyncratic volatility predict future growth of the Australian economy?", Studies in Economics and Finance, Vol. 33 No. 1, pp. 69-90. https://doi.org/10.1108/SEF-08-2014-0160